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Issue 119


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Top 10 Investment Grade, Cumulative Preferreds Available Under $25



The highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 10.3 percent Yield-To-Call in today's preferred stock marketplace and there are now 57 of these gems to pick from.

As rates move up and down over time, prices tend to move in the opposite direction, moving down and up, respectively. This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.


Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find the highest quality preferred stocks available for less than $25. Of the twenty-five parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


Figure 2 shows the results when this search is applied to our Preferred Stock List
TM database, with ETDs shown in green font (please note that to protect the values of subscriptions to our CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.



There were a total of 879 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 879, these are the top ten highest quality issues that are trading below their $25 par value. This list is sorted by dividend rate (coupon) with the highest payers listed first.

All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.

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New Preferred Stock IPO’s, January 2017


Since the Fed started raising the federal funds rate in December, the U.S. preferred stock market has been offering today’s buyers the best prices (and therefore yields) that we have seen since last spring.

There are currently 114 high quality preferred stocks selling for an average price of $24.77 (January 31), offering an average yield-to-call of 5.70 percent. And 57 of these high quality issues are selling below their $25 par value. By high quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings, cumulative dividends and call-protection.

But prices have been edging back up since the beginning of the year as the impact of the Fed’s December rate increase has started to wear off. I’ll compare market reaction of the December 2016 rate increase to that of December 2015 in a moment, but U.S. preferred stock prices increased an average of $0.59 per share during January.

January’s new issues

With upward pressure on rates, we typically see fewer new preferred stock issues and January was no exception. Only three new preferred stocks were introduced for the consideration of preferred stock investors during January. But with 57 high quality issues currently available for less than their $25 par value to pick from, the number of new preferred stock IPOs becomes much less relevant to today’s buyers.



There are now a total of 879 of these securities trading on U.S. stock exchanges.

Note that I am using IPO date here, rather than the date on which retail trading started. The IPO date is the date that the security’s underwriters purchased the new shares from the issuing company. Anxious to sell the new shares, underwriters will generally sell to broker/dealers using a temporary trading symbol on the wholesale Over-The-Counter exchange (who, in turn, sell them to us at retail within a few days of the IPO date).

Buying New Shares for Wholesale

Note that the most recently introduced issues – PNYLP from Pennsylvania REIT (PEI) and MSDDP from Morgan Stanley (MS) - are still trading on the Over-The-Counter exchange (as of January 31). These are temporary OTC trading symbol until these securities move to the NYSE, at which time they will receive their permanent symbols.

But there is no need to wait; during a period of relatively high prices, individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see "Preferred Stock Buyers Change Tactics For Double-Digit Returns" for an explanation of how the OTC can be used to purchase shares for discounted prices during a period of high preferred stock prices).

Those who have been following this strategy of using the wholesale OTC exchange to buy newly introduced shares for less than $25 are more able to avoid a capital loss as prices start to drop (if they choose to sell).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC. PNYLP will become PEI-C and MSDDP will become MS-K.


While few in number, January’s three new issues are from diversified issuers.

Medley LLC is an operating company held by Medley Management, Inc. (MDLY). Medley is primarily in the commercial lending business, raising capital from investors that it then loans to commercial borrowers. MDLQ, at 7.250 percent maturing on January 30, 2024, is actually an Exchange-Traded Debt Security (indicated by green font in the above table). ETDS are very similar to preferred stocks and are frequently labeled as such on brokerage statements, but are actually bonds recorded on the company’s books as debt rather than equity. MDLQ is the second new income security introduced by Medley LLC since last August, when it issued MDLX at 6.875 percent. Both are unrated.

PNYLP (soon to be PEI-C) offers a 7.200 percent coupon and is Pennsylvania REIT’s first income security since 2012. Founded in 1960, PEI owns and operates a variety of shopping malls throughout the Eastern United States. PNYLP is the company’s largest new issuance to-date, raising about $150 million, about 50 percent more than its prior two issues. As with PEI’s prior issues, PNYLP offers cumulative dividends (if they miss a payment, they still owe you the money; their obligation accumulates). With Sears on the brink, and Macy’s not far behind, shopping mall property REITs are having to be increasingly creative as online shopping continues to weigh heavily on foot traffic. For their part, PEI sold two non-core malls in January, generating $49 million.

MSDDP (soon to be MS-K) is Morgan Stanley’s first income security since 2014, offering a 5.850 percent non-cumulative dividend. MSDDP continues a trend we have seen with income securities offered by banks over the last three years where the dividend rate is fixed until the call date (5.850 percent until April 15, 2027 in this case), but becomes variable after that, pegged to the three-month LIBOR plus 3.491 percent (currently 1.039 percent). Buyers should be cautious of this structure since, while sounding especially attractive during a period of increasing rates, issuers will frequently call the shares on the call date if not doing so means increasing their dividend expense to shareholders (see “Variable-Rate Preferred Stocks Underperform Their Fixed-Rate Cousins”).

(Sources: Prospectuses MDLQ, PNYLP/PEI-C, MIDI/MS-K. CDx3 Notification Service database,

Tax Treatment

Dividends paid by REIT preferred stocks, such as January’s PNYLP from Pennsylvania REIT, are a pre-tax distribution of the company’s earnings to shareholders. As a pre-tax distribution, it is the shareholder who pays the full tax so dividends received from REITS do not qualify for any type of favorable tax treatment (although portions of REIT dividends are frequently re-classified at tax-time as capital gains, hence lowering your tax burden in that manner).

On the other hand, dividends received from Morgan Stanley’s MSDDP are a distribution of the bank’s after-tax earnings and are therefore designated as being Qualified Dividend Income (“QDI” in the Status column of the above table), although there are exceptions and conditions (see prospectus).

In Context: The U.S. Preferred Stock Marketplace

So how do the new January issues stack up within the context of today’s preferred stock marketplace?

As illustrated in this chart, preferred stock investors have been reacting to the December 2016 rate increase in very much the same way as they did to the December 2015 hike. Anticipating a Q4 hike, sellers started selling their shares in August of both years. But as multiple, ongoing increases became less likely, prices started bouncing back up.



The data being charted here is limited to call-protected issues in order to limit the price distorting effect of an anticipated redemption.

The average market price of U.S.-traded preferred stocks is now at $25.17 per share, an annualized increase of 28.8 percent for January. But even with January’s price hike, U.S. preferred stock prices are still at their lowest level since last spring, presenting a strong market for today’s income investors.

Will it last?

The upward pressure on rates that began last August has clearly started to weaken, putting upward pressure on preferred stock prices.

Two of the most significant headwinds that are keeping rates from rising, and contributing to increasing preferred stock prices, are (1) continued zero-to-negative rates implemented by foreign central banks and (2) insensitivity by member banks toward changes in the federal funds rate.

Because of the zero-to-negative rates set by their central banks, foreign investors have been moving record amounts of cash into U.S. income securities for many months (see “Here’s why 10-year Treasury may still drop below 1%“), putting upward pressure on prices here. If anything, the U.S. income security market has become even more attractive to such foreign investors.

Secondly, remember that the federal funds rate is the rate that member banks are charged when they need to borrow some cash overnight to pump up their reserves in order to meet regulatory requirements. U.S. banks have over $2 trillion in excess reserve cash - that's above and beyond the elevated 2010 Dodd-Frank requirements (see “Fed Worries About Deflation But Pays Banks Billions Not To Lend QE Proceeds”). The demand by member banks for overnight loans from the Fed has been, and remains, minimal, so fiddling with the federal funds rate does not have anything like the lasting impact it used to.

But many things affect the market prices of these securities such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer, perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a “bang-for-your-buck” measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.

U.S.-traded preferred stocks are currently returning an average current yield of 6.6 percent, down from 6.8 percent at the end of December.



For comparison, I have set the Yield column in the first table above to show the current yield of the three new January preferreds on January 31.

It is into this marketplace that January’s new issues were introduced.










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Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with 94 reviews posted at Amazon.

The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are currently facing.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.