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Issue 104


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by Doug K. Le Du


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See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.








Top 10 Investment Grade, Cumulative Preferreds Available Under $25



The ten highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.5 percent Yield-To-Call in today's preferred stock marketplace.

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 these gems. Of the twenty 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 (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, that you received at the end of last month for symbols.



There were a total of 893 preferred stocks and ETDs trading on U.S. stock exchanges as last month came to a close. Of these 893, 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.

The securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining securities listed are preferred stocks. 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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Hidden Risks of Tax-Advantaged Preferred Stocks


As we approach the end of the year, tax considerations tend to move to the front burner. Preferred stocks can offer opportunities in this regard since some pay dividends that are classified as Qualified Dividend Income (QDI). QDI-designated dividends are taxed at a lower rate than dividends that are not so designated in their prospectus.

Preferred stock investors who acquire shares in a regular income account, rather than a tax-deferred account such as an IRA, will often favor QDI-designated issues.

QDI Qualification

The designation comes from the idea that if your dividends are paid to you out of the company’s after-tax profits, you get a tax break since the company has already paid corporate income tax on the money (the question of why you should have to be taxed on money that the issuing company has already paid tax on will forever remain a favorite political football).

Conversely, if your dividends are paid to you out of the company’s pre-tax revenue (such as in the case of preferreds issued by REITs), then your dividends are taxed at your regular income tax rate – you, rather the company, pay the full tax.

The tax break that you get for QDI-designated preferred stock dividends depends on which tax bracket you fall into. This table shows the QDI tax rate for each federal income tax bracket.



(Sources: Wikipedia,; Putnam Investments,

Seven To Pick From

Of the 736 preferred stocks trading today (traditionals, trust and 3rd-party trust, excluding ETDs), 381 are designated as paying QDI dividends (52 percent). That’s the good news. The bad news is that most risk-averse preferred stock investors would probably avoid almost all of these.

Of the 381 QDI-designated preferreds trading today, only 198 offer cumulative dividends. And looking for those with an investment grade Moody’s rating drops the list down to 121. But even at that, 73 out of the remaining 121 are so old that they have become illiquid (daily volume is zero since there are no sellers); that leaves 48.

Most of these 48 were issued at a time when rates were higher than today, making redemption of the shares highly likely. Who wants to purchase shares and have the issuing company call them the next day? If you are looking for call protection of at least a year (to avoid short-term capital gain treatment), you’re actually down to eight preferred stocks, seven of which have the $25 par value that most preferred stock investors favor.

So here is the list of the seven QDI-designated preferred stocks that offer cumulative dividends, investment grade ratings, a non-zero trading volume with at least one year of call protection and a $25 par value (sorted by Current Yield, highest to lowest).


Note that the highest QDI-designated payer is GRX-B from Gabelli Healthcare & WellnessRx Trust at 5.875 percent.

(Source: CDx3 Notification Service database,

Non-QDI Peers

Using the same criteria as a filter, here are the top seven non-QDI preferreds with the highest current yield (October 27, 2015 prices).



For comparability, I sorted these lists by Current Yield here rather than Yield-To-Call or Effective Annual Return so the yield values indicate the annual dividend return (i.e. the shares are not sold within the first year so no capital gain/loss or reinvested dividend income is reflected in the yield values seen here).

Notice that while QDI-designated preferreds offer a lower tax rate than their non-QDI peers, they also pay less dividend income to begin with. In other words, the tax benefit offered by the seven QDI-designated preferred stocks is at least partially offset by the lower dividend rate they offer when compared to very similar non-QDI preferreds.



So at what point is a preferred stock investor actually benefiting from the lower tax rate offered by QDI-designated preferred stocks?

6.95 Percent Coupon is Break-Even

The answer, of course, depends on which specific preferred stocks are being compared and which tax bracket you fall into. This next chart compares the after-tax income produced by GRX-B, the highest QDI payer, to the after-tax income offered by the seven comparable non-QDI securities (assuming a 28 percent regular income tax bracket).



GRX-B pays $1.25 in after-tax dividend income. The break-even dividend rate, where you start to become better off by purchasing non-QDI shares rather than shares of the QDI-designated GRX-B, is 6.95 percent. In other words, those holding shares of the non-QDI HPT-D, DLR-H and CUBE-A are earning higher after-tax income than the QDI-designated GRX-B.

Return of Principal

On the principal protection front, remember that issuers rarely redeem preferred stocks that offer a coupon below 6 percent. Public Storage, for example, has never redeemed a preferred with a coupon below 6.125 percent. As the highest QDI payer, GRX-B offers a higher after-tax income than four of our seven non-QDI peers, but at 5.875 percent, Gabelli is highly unlikely to ever redeem GRX-B so it may be many years before GRX-B shareholders see a return of their principal (if ever).

Here’s another case where the QDI-designated candidate may not be all that it seems. This next chart presents the after-tax income generated by these fourteen nearly identical securities.



SCE-J from Southern California Edison and DLR-I from Digital Realty (which has yet to declare its first dividend but is expected to shortly) offer the same after-tax income at $1.14 per share. But look at their market prices.


SCE-J offers a 5.375 percent coupon and is selling for $26.56 per share; that’s $1.56 over par. DLR-I, on the other hand, offers a 6.350 percent coupon but is priced $0.06 below par at $24.94.

At 6.350 percent, DLR-I is not only much more likely to be redeemed at some point by its issuer (returning your principal), but today’s buyers will realize a $0.06 per share capital gain in the event of such a redemption.

What’s Next?

While being QDI-qualified lowers the tax rate applied to your dividend income, the lower coupon rate that QDI-qualified preferred stocks offer can eliminate the tax savings when compared to similar non-QDI alternatives. And the higher coupons offered by the non-QDI peers increase the likelihood of a future redemption, meaning that the invested principal of today’s buyers is highly likely to be returned to them downstream.

There are currently 97 non-QDI, call-protected preferred stocks (counting ETDS) offering cumulative dividends and investment grade Moody’s ratings. And 55 of these 97 non-QDI candidates offer higher coupon rates than their QDI-designated peers, so today’s non-QDI buyers are much more likely to realize a future return of their principal upon redemption.

These results will vary, of course, depending on how the math works out with the particular alternatives you may be considering. But as we lean toward the end of 2015, this apples-to-apples comparison, or as close as I could get to it, indicates that favoring QDI-designated preferred stock for your regular income (non-IRA) account may not be delivering the after-tax benefit that you’ve been counting on.










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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 88 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


Here is a list of some of my recent syndicated articles. To view an article, just click on the headline.

























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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.