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JUNE 2016

Issue 111


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by Doug K. Le Du


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Top Paying Investment Grade, Cumulative Preferreds



High quality preferred stocks continue to be in very high demand. The highest quality preferred stocks that are selling within one dividend of par are offering income investors an average 5.0 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 within one dividend of 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 within one dividend of par

Purchasing shares close $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 close to (or below, when available) their par value, preferred stock investors are able to add a layer of principal protection to their investment.


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 "Today's price, at most" parameter to "25.45" does the magic here.


In addition to finding the highest quality issues that offer cumulative dividends and are currently trading within one dividend of 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, for symbols.



There were a total of 899 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close. Of these 899, these are the top highest quality issues that are trading within one dividend of their $25 par value. This list is sorted by last price with the lowest priced issues 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 within one dividend of their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's.

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, May 2016


May was a solid month for new preferred stocks, with ten new issues being introduced with an average current yield of 6.1 percent for the consideration of preferred stock investors. There are now 899 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 three most recently introduced issues - GDSTP, HRHPP and GABUP - are still trading on the Over-The-Counter exchange (as of May 27). These are temporary OTC trading symbols until these securities move to a big board exchange, at which time they will receive their permanent symbols. But there is no need to wait; during a period of 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).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC. GDSTP will become GOODM; HRHPP will become HT-D and GABUP will become GUT-C.


May’s preferred stock offerings are unique in several ways. First, all ten of the new issues are traditional preferred stocks (no Exchange-Traded Debt Securities and no 3rd-party Trust preferreds) and only one bank is represented – IBKCO from Iberiabank (IBKC). Among these ten May issues, all except IBKCO offer cumulative dividends (meaning that in the event of a skipped dividend payment, the company still owes you the money; their obligation accumulates).

Further, six of the new issues are from property REITs – HRHPP from Hersha Hospitality Properties (HT), LHO-J from LaSalle Hotel Properties (LHO), AMH-D from American Homes 4 Rent (AMH), PSA-C from Public Storage (PSA), SHO-F from Sunstone Hotels (SHO) and DFT-C from DuPont Fabros

(DFT). And three of these six property REITs are hotel REITs – HRHPP, LHO-J and SHO-F.

GDSTP is from Gladstone (GLAD), a business development company and Gabelli’s new GGZ-A and GABUP are both closed-end funds.

Tax Treatment

Dividends paid by REIT preferred stocks 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 qualified 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).

The dividends received from Iberiabank’s IBKCO and Gabelli’s GABUP, on the other hand, are a distribution of the company’s after-tax earnings and are therefore designated as being Qualified Dividend Income (QDI), although there are exceptions and conditions (see prospectus).

About the New Issues

Shortly after the housing collapse that began in 2008, a group of senior executives spun away from Public Storage and formed American Homes 4 Rent and, using the same capital raising strategy that they had become accustom to, issued three new preferred stocks – AMH-A, AMH-B and AMN-C. With the proceeds, AMH bought tens of thousands of distressed homes throughout the U.S. at bargain basement prices and turned them into rental properties. These three issues are unique in that their prospectuses include a provision that increases these securities’ $25 par value over time (the amount of the increases being published on the company’s website). In the event of a redemption, shareholders will actually receive more than the stated $25 par (see “American Homes 4 Rent Preferred Stocks, Opportunities And Risks”). Sadly, with the May introduction of the new AMD-D, that par-inflating provision has been removed. Upon redemption, AMD-D shareholders will receive the stated par value of $25.

Iberiabank’s IBKCO offers fixed-to-floating dividends, meaning that they pay dividends at the indicated coupon rate (6.60 percent) until its call date (May 1, 2026) then, at that time, the dividend rate becomes variable, resetting each quarter based on a formula as presented within this security’s prospectus. The current 6.60 percent coupon rate will be reset to the three-month LIBOR rate at the time (currently 0.66 percent) plus 4.92 percent. But be careful to notice that IBKCO’s call date, when the new presumably glorious rate kicks in, is ten years from now, meaning that the income to be generated by this security at that time is entirely unknown.

Preferred stock investors should be aware that variable rate preferred stocks have rarely, if ever, benefited shareholders. While the notion that your dividend rate will go up with interest rates sounds great, the fact that the presumably upward adjustment in the rate is tied to the call date is no accident. Historically, if the dividend rate is going to adjust upward, the issuing company will usually redeem the shares in order to avoid the increase in dividend expense. Consequently, those purchasing fixed-rate preferred stock shares have earned about 180 percent more than those purchasing variable-rate preferreds during the same period (for historical data see “Variable-Rate Preferred Stocks Underperform Their Fixed-Rate Cousins”).

(Sources: Prospectuses IBKCO, GGZ-A, DFT-C, PSA-C, SHO-F, AMH-D, LHO-J, GDSTP, HRHPP, GABUP. CDx3 Notification Service database,

In Context: The U.S. Preferred Stock Marketplace

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

U.S.-traded preferred stocks remain in very high demand. Coupled with the limited success of the Fed’s efforts to increase the cost of money, the average market price of U.S.-traded preferred stocks has increased by $0.98 per share this year (an annualized value gain of 9.6 percent).



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

Beyond ratings, 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 (think upstream oil producers), 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.

While the continuing strong demand for U.S. preferred stocks can be attributed to several factors, the next chart makes it pretty clear that the lack of attractive alternatives is certainly among them. U.S.-traded preferred stocks are currently returning an average current yield of 7.3 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.8 percent and that of the 2-year bank CD is a meager 1.5 percent.



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

Income versus Value Investing, Year-To-Date

For comparison, I have set the Yield column in Figure 3 above to show the current yield of the ten new May preferreds on May 27. With an average current yield of 7.3 percent, plus the 9.6 percent annualized YTD value gain, those investing in U.S.-traded preferred stocks since the beginning of 2016 are currently on pace for a total annualized return of almost 17 percent (7.3 percent of which is realized in dividend cash).

Those investing in common stocks, as measured by the S&P500, have also done well this year, seeing an unrealized annualized value appreciation of about 10.3 percent plus about two percent in average annualized dividend yield.










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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.