New Preferred Stock
IPO’s, February 2019
upward pressure on preferred stock prices that we saw during January continued throughout
February. As the month came to a close, the average market price for all U.S.
traded preferred stocks was $24.72, up $0.15 per share over the last month.
good news is that $24.72 is still below these securities’ $25.00 par value. Remember
that the par value is what shareholders will receive in cash should the issuing
company decide to redeem your shares so buying shares below par sets you up for
a downstream capital gain on top of the regular dividend income provided by
February’s new issues
six new preferred stocks are offering an average annual dividend (coupon) of 6.5
percent, an average current yield (which does not consider reinvested dividends
or capital gain/loss) of 6.5 percent and an average Yield-To-Call (which does
consider reinvested dividends and capital gain/loss) of 6.4 percent (using February
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
underwriters purchased the new shares from the issuing company.
special note regarding preferred stock trading symbols:
Annoyingly, unlike common stock trading symbols, the format used by
and other online quoting services for preferred stock symbols is not
For example, the Series A preferred stock from Public Storage is
TDAmeritrade, Google Finance and several others but this same security
“PSA.PR.A” at E*Trade and “PSA.PA” at Seeking Alpha. For a
table of how preferred stock symbols are denoted by sixteen popular
other online quoting services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
are currently 127 high quality preferred stocks selling for an average price of
$24.81 (February 28), offering an average current yield of 5.6 percent. And 60 of
these high-quality issues are selling below their $25 par value, offering an
average current yield of 5.5 percent. By high quality I mean preferreds
offering the characteristics that most risk-averse preferred stock investors
favor such as investment grade ratings and cumulative dividends.
is now a total of 894 of these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying new shares for
that PRNCP from Priority Income Fund, SFEIP from Stifel Financial (SF) and ALSCP
from Air Lease Corporation (AL) are still trading on the wholesale
Over-The-Counter exchange. These are temporary OTC trading symbols until these
securities move to their retail exchange, at which time they will receive their
there is no need to wait. Individual investors, armed
with a web browser and an online trading account, can often purchase
introduced preferred stock shares at wholesale prices just like the big
guys (see “Preferred
Stock Buyers Change Tactics For Double-Digit Returns"
an explanation of how the OTC can be used to purchase shares for
who have been following this strategy of using the
wholesale OTC exchange to buy newly introduced shares for less than $25
more able to avoid a capital loss if prices drop (if they choose to
broker will automatically update the trading symbols of any shares you purchase
on the OTC. PRNCP will become PRIF-C, SFEIP will become SF-B and ALSCP will
About the new issues
CHMI-B is an unrated, traditional preferred stock from Cherry Hill Mortgage
Investment Corporation (CHMI). This security offers cumulative dividends using
the fixed-to-float rate structure, paying 8.25 percent until its April 15, 2024
call date. The rate becomes variable at that time, using the three-month LIBOR
rate (currently at 2.64 percent) plus 5.631 percent. Page S-16 of the
prospectus explains how the floating rate will be calculated should the 3-month
LIBOR become unavailable. CHMI is a $300 million mortgage REIT, meaning that
rather than owning physical properties as a property REIT would, the company
seeks to generate earnings from the spread between yields on its investments
and its cost of borrowing. Its investments are bundles of mortgages (primarily
residential), 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).
from CMS Energy Corporation (CMS) is an Exchange-Traded Debt Security,
also referred to as a baby bond, paying 5.875 percent in annual interest. ETDS’
are bonds recorded on the company’s books as debt (rather than as equity, as in
the case of preferred stock). As debt, the obligation to pay the interest on
these bonds is cumulative. As bonds, ETDS’ are often seen as having lower risk
than the same company’s preferred stock shares. ETDS are very similar to
preferred stocks and are often listed on brokerage statements as such. CMSD
offers double investment grade ratings. CMS, founded in 1987, is the largest
electric and natural gas utility in Michigan through its principal subsidiary
Consumers Energy Company.
is an ETDS offered by Fidus Investment Corporation (FDUS), paying 6.0
percent in annual interest. Fidus is incorporated as a business development
corporation, investing in various types of small businesses within the United
States. This bond becomes callable on February 15, 2021 (a relatively short
two-year call protection period) and matures on February 15, 2024. The company
has two ETDS trading, with FDUSL being a $43 million issue introduced a year
ago. FDUSZ is a $60 million issue, half-again the size of FDUSL. These two debt
securities represent about a third of the company’s $380 million market value.
is an unrated traditional preferred stock issued by the Priority Income
Fund offering 6.25 percent dividends. The fund is managed by Priority Senior
Secured Income Management, LLC which, in turn, is part of the Destra Capital
Investment, LLC stable. On their website, the fund’s objectives are stated in
the most non-specific terms possible as “Priority Income Fund seeks to generate
current income and long-term capital appreciation by strategically investing in
broad pools of senior secured, floating rate loans made primarily to U.S.
companies. The Fund's goals are to increase income and portfolio
diversification and reduce correlation to traditional fixed-income assets.”
(make some investments and make some money). PRNCP is the fund’s third preferred
stock offering in the last eight months. While the prior two securities offered
cumulative dividends, the new PRNCP’s dividends are non-cumulative. Neither
Destra nor Priority Senior Secured Income Management, LLC are publicly traded.
is from Stifel Financial Corporation (SF), the company’s third
currently-trading income security and its first issue since September 2017.
This security is nearly identical to SF-A issued in July 2016. SFEIP pays
non-cumulative 6.25 percent annual dividends and has a speculative grade BB-
rating from S&P. Stifel is a $4 billion investment banking company with
global operations. Looking at their financials, the company posted a very
strong 2018 with Net Income From Operations more than doubling their 2017
performance. Revenue was up while expenses were down and the company has very
health cash flow (from which preferred stock dividends are paid). From their
2018 financials, it is unclear why S&P is sticking with their miserly BB-
rating. Stifel was founded in 1890 and is headquartered in St. Louis, Missouri.
is from Air Lease Corporation (AL) and is a non-cumulative traditional
preferred stock offering a 6.15 percent annual dividend and a BB+ S&P
rating. ALSCP is the company’s only income security. Like CHMI-B discussed
above, this security’s 6.15 percent dividend is fixed until its March 15, 2024 call
date. At that time, the dividend rate will float and will equal the three-month
LIBOR plus 3.65 percent. Air Lease leases its 275 aircraft and intends on using
the $250 million in proceeds from ALSCP to pay down debt. The $4.2 billion company
was founded in 2010 and is headquartered in Los Angeles.
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses: CHMI-B, CMSD, FDUSZ, PRNCP/PRIF-C, SFEIP/SF-B, ALSCP/AL-A
sure you don’t miss this. The 2017 Tax Act included a provision aimed at small
businesses that is also going to deliver an enormous benefit to those holding
shares of preferred stocks issued by REITs (which is pretty much all of us).
Most small businesses are incorporated as a Limited Liability Corporation
(LLC). Under this structure, the company’s earnings are passed through to the
owners who then pay the tax on their personal returns. The Act allows those
receiving such income to deduct, right off the top, up to twenty percent of
this “pass-through income.”
remember that REITs do the same thing as LLC’s – at least 90 percent of a
REIT’s earnings are passed to the REIT’s shareholders primarily in the form of
preferred stock dividends; the shareholders then pay the tax on their personal
returns. In other words, preferred stock dividends received from REITs qualify
under the Act’s “pass-through income” provision and are therefore up to twenty
percent deductible. Put another way, you can reduce your taxable dividend
income from REIT dividends by up to twenty percent under the 2017 Tax Act. Check
your 1099’s for a line labeled “Section 199A dividends” and be sure to consult
your tax accountant.
tax treatment of the taxable income you receive from income securities can be a
bit confusing, but it really boils down to one question – Has the company already
paid tax on the cash that is being used to pay you or not? If not, the IRS is
going to collect the full tax from you; if so, you still have to pay tax, but
at the special 15 percent rate.
preferred stock dividends are typically paid out
of pre-tax profits so are taxable as regular income; you pay the full
the company has not.
incorporated as REITs (CHMI-B) are required to
distribute at least 90 percent of their pre-tax
profits to shareholders. Doing so in the form of non-voting preferred
dividends is the most common method of complying and because these
payments are made from pre-tax dollars, dividends received from REITs
as regular income (i.e. they do not qualify for the special 15 percent
that a company pays to those loaning the company
money is a business expense to the company (tax deductible), so the
does not pay tax on the interest payments it makes to its lenders (i.e.
payments made to lenders are paid with pre-tax
dollars). Since Exchange-Traded Debt Securities are debt, ETDS
on the hook for the taxes. Income received from ETDS’ is taxed as
income (CMSD, FDUSZ).
if a company pays your preferred stock dividends out of its after-tax profits, the dividend income
you receive is taxed at the special 15 percent tax rate. Such dividends are
referred to as “Qualified Dividend Income” or QDI. QDI preferred stocks are
often seen as favorable for holding in a non-retirement account due to the
favorable 15 percent tax treatment. Looking at the Status column in the above
table, the prospectuses for three of February’s new issues state that their
dividends are QDI-qualified (PRNCP, SFEIP, ALSCP). Note that I saw one report
stating that only a portion of the dividend received from PRNCP will be QDI (which
I have never seen before) so you may want to contact the issuer for
In Context: The U.S.
preferred stock marketplace
following chart illustrates the average
market price of U.S.-traded preferred stocks over the last twelve
things affect the market prices of these securities
such as the proximity to their call or maturity date, proximity to
ex-dividend date, industry and/or overall health of the issuer,
direction of interest rates, pending government regulatory or policy
cumulative versus non-cumulative dividends and tax treatment of
payments. So what we really need to look at is current yield, which
the average annual dividend yield per dollar invested (without
re-invested dividend return or any future capital gain or loss).
is a “bang-for-your-buck” measure of value that normalizes differences
coupon rate and price to give us a single, comparable metric.
down the risk scale, the next chart compares the
average current yield realized by today’s preferred stock buyers when
to the yield earned by those investing in the 10-year Treasury note or
bank Certificates of Deposit.
cost of money has not changed much since the end of last month. U.S.-traded preferred
stocks are currently returning an average current yield of 6.9 percent (blue
line) while the annual return being offered to income investors by the 10-year
treasury is 2.7 percent and that of the 2-year bank CD has turned the yield
curve upside down at 2.9 percent (shorter term money very rarely offers a
higher return than longer term money).
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.