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MARCH 2017

Issue 120


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by Doug K. Le Du


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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 7.4 percent Yield-To-Call in today's preferred stock marketplace and there are now 49 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 959 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 959, 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.


Note the huge YTC value for the eighth security listed here. While accurate, this security is very close to its call date and is still trading below its $25 par value. If called on its call date, today's buyers would realize a $0.15 per share capital gain in a very short time period, making for the 298.71 percent annualized YTC value seen here.

All of these high quality securities 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, February 2017


While the Fed’s December 2016 rate hike brought great prices to preferred stock buyers, preferred stock prices have been edging back up, increasing an average of $0.35 per share during February. So far this year, the average market price of U.S.-traded preferred stocks is up $0.80, an annualized increase of 19.4 percent.

There are currently 111 high quality preferred stocks selling for an average price of $25.12 (February 28), offering an average yield-to-call of 5.59 percent. And 49 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.

February’s new issues

Uncertainty with respect to the future direction of the cost of money will often cause preferred stock issuers to take a wait-and-see approach to introducing new issues. While we frequently saw 10 or more new issues per month a year ago, only two new preferred stock issues were introduced during February (following January’s three IPOs). Both of February’s new preferred stocks are unrated.

But with 49 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 959 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

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 two new issues – PKRDP from Parker Drilling (PKD) and CIMEP from Chimera Investment Corp. (CIM) - are still trading on the Over-The-Counter exchange (as of February 28). 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. PKRDP will become PKDP and CIMEP will become CIM-B.

About the new issues

PKRDP (soon to be PKDP) is the first preferred stock issued by Parker Drilling, its 500,000 shares raising about $50 million (gross) for the company. This issue has a somewhat rare $100 par value and offers 7.25 percent cumulative dividends (if they miss a payment, they still owe you the money; their obligation accumulates). This is a mandatory convertible preferred stock, meaning that these preferred stock shares will convert to the company’s common shares on the preferred share’s maturity date of March 31, 2020 (subject to several conditions specified in the prospectus). Parker was established in 1934 and provides drilling equipment and services to the oil and gas industry, both domestically and internationally. The drop in oil prices over the last couple of years, along with the dilutive introduction of additional common shares, has seen Parker’s common stock lose about two-thirds of its value since January 2014.

CIMEP (soon to be CIM-B) is Chimera’s second preferred stock issue in less than five months, its CIM-A security issued last October 6. CIM is a mortgage REIT, meaning that rather than owning physical properties as a property REIT would, Chimera seeks to generate earnings from the spread between yields on its investments and its cost of borrowing. Its investments are bundles of mortgages (residential and commercial), many of which can be long-term in nature. Consequently, during periods of increasing interest rates, the shorter-term cost of borrowing tends to increase while revenues tend to be locked in at lower rates for longer periods of time. This math often squeezes the earnings of mortgage REITs, requiring nimble management of their investment portfolio (often moving toward bundles of variable rate and/or shorter-term mortgages). CIMEP offers a fixed 8.0 percent cumulative dividend until its March 30, 2024 call date, at which time its dividend rate will float to equal the three-month LIBOR rate (currently at 1.034 percent) plus 5.791 percent.

(Sources: Prospectuses PKRDP/PKDP, CIMEP/CIM-B. CDx3 Notification Service database,

Tax Treatment

When purchasing preferred stock in a non-retirement account, many preferred stock investors will favor shares that are designated as paying Qualified Dividend Income (“QDI” in the Status column of the above table) since QDI dividends are taxed at the more favorable 15 percent tax rate.

If a company pays your dividend out of their after-tax cash (i.e. the company has already paid tax on the cash), you are obligated to pay additional tax on this same money, but at the lower 15 percent rate (this taxing of the same money twice is the “double taxation” of dividends that often serves as a favorite political football).

On the other hand, if the company pays your dividend out of pre-tax earnings, such as the case with REIT preferred stocks (both property REITs and mortgage REITs), the government collects the full tax from you, taxing such dividends as regular income (no tax break).

Looking at the Status column, dividends received from Parker Drilling’s PKRDP are a distribution of the company’s after-tax earnings and are therefore designated as being Qualified Dividend Income (see prospectus for exceptions and conditions).

In Context: The U.S. Preferred Stock Marketplace

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

As illustrated by this chart, preferred stock investors have been reacting to the December 2016 rate increase in very much the same way that 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 $25.52 per share, an annualized increase of 16.7 percent for February.

Will it last?

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

For many months now, 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.

Foreign investors continue to be attracted by U.S. income securities since they are facing zero-to-negative rates at home. This foreign demand puts upward pressure on prices here. And U.S. banks are holding over $2 trillion in excess reserve cash - that's above and beyond the elevated 2010 Dodd-Frank requirements. The demand by member banks for overnight loans from the Fed has been, and remains, minimal, rendering changes to the federal funds rate less compelling.

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 6.57 percent, falling 0.07 percent since the end of January.



For comparison, I have set the Yield column in the first table above to show the current yield of the new February preferreds on February 28.

It is into this marketplace that February’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).













Recent Preferred Stock Articles by Doug K. Le Du


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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.