PREFERRED
STOCK NEWS
Preferred
Stock versus Common Stock Performance for
2015
The common stock market, as
reflected by the S&P 500 Index, was unable
to gain traction last year. Anticipation of
a federal funds rate increase was the
primary spoiler, although continued
instability in the Middle East, low oil
prices, a softening economy in China and the
Russia/Ukraine wild card added to the
uncertainty.
The S&P 500 ended 2014 at 2058.90 and, a
year later as 2015 wrapped up, closed at
2043.94, losing 0.7 percent.
424 of the 500 companies in
the S&P 500 Index paid a common dividend
with an average current yield of 2.05
percent last year, so common stock investors
at least had their dividend yield to point
to.
Sources: S&P 500 values,
SeekingAlpha.com; S&P 500 dividend data,
factset.com
Preferred stock
returns
Preferred stock investors are
generally investing for the steady income
that these securities provide. With a
long-term dividend average of about 7
percent, daily price fluctuations are not
the primary focus. But that’s not to say
that value appreciation opportunities do not
present themselves.
Importantly, the market pressures that act
upon common stock prices can often be very
different than those affecting the market
prices of preferred stocks, so you do not
want to make the mistake of assuming that if
common stock prices are heading up or down
the same will be true of their preferred
cousins.
In early-2015, for example, renewed turmoil
in Greece put upward pressure on the market
prices of high-quality U.S. preferred
stocks, since many savers there became
holders of income securities here.
By high quality, I am referring to those
issues favored by most risk-averse preferred
stock investors – cumulative dividends,
call-protected, investment grade ratings, on
so on. While overall preferred stock market
prices fell by $1.36 per share throughout
2015 (almost entirely in energy), demand
remained strong for high quality issues.
High quality preferred stocks
started 2015 at an average market price of
$25.98 per share and ended the year at
$26.13, posting a 0.6 percent value gain.
You can see prices of both
common and high quality preferred stocks
drop in September as many market
participants came to believe that the Fed
was going to start raising interest rates at
their September 16-17 FOMC meeting. When no
such increase was announced, buyers stepped
back in, only to shy away once again as the
FOMC’s December meeting approached.
There are obviously many investors who are
treating an income investment (preferred
stocks) as if it were a value investment
(common stock), trying to apply the
buy-low-sell-high strategy of a common stock
investor to preferred stocks.
Volatility
The following chart shows the percent change
in the market price of common stocks versus
that of high quality preferred stocks
throughout 2015.
Note how little volatility
preferred stock prices exhibited when
compared to common stock prices. This is
typical since preferred stocks have a par
value ($25 per share in all cases used here)
that resists price movement (for 2014 data,
see “Preferred
Stock Versus Common Stock Investing Results”).
Source: Preferred stock data,
PreferredStockInvesting.com
Higher reward for lower risk
Not only did preferred stock
investors experience far less price
volatility throughout 2015, their dividend
income was substantially higher as well.
Specifically, while common stock investors
saw 2.05 percent in average dividend yield,
preferred stock investors buying shares in
January 2015 realized an average of 6.6
percent by year-end.
For 2015, preferred stock investors
investing in the highest quality issues saw
a combined return (value appreciation plus
dividends) of 7.2 percent, compared to 1.35
percent for common stock investors.
While outperforming common
stock investors, preferred stock investors
were exposed to substantially lower risk.
Remember that dividend cash is always paid
to preferred stock shareholders first,
before any dividend payments are made to the
same company’s common stockholders (hence
the name “preferred”).
And note that this analysis is limited to
the highest quality preferred stocks, which
have cumulative dividends (meaning that if
the issuing company skips a payment to you,
they still owe you the money; their
obligation accumulates). Common stock
dividends are, by definition, non-cumulative
meaning that they can be cancelled at any
time, leaving the shareholder with no
recourse whatsoever.
Lastly, where the highest quality preferred
stocks used here offer investment grade
ratings, common stocks are not rated at all;
no quantitative measure of creditworthiness
(the ability to make future dividend
payments) is offered to those considering
buying common stock shares.
As with 2014, 2015 provided
another case of higher returns with less
volatility being realized by those taking
substantially lower risk.
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