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Issue 125


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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 highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 5.4 percent Yield-To-Call in today's preferred stock marketplace and there are now 12 of these gems to pick from.

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 953 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 953, 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.


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. Note that the YTC for the fifth security listed cannot be calculated since its call date is August 1, 2017.

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 securities 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, July 2017


Preferred stock investors have ignored the last three interest rate hikes from the Federal Reserve. Despite three rate hikes since December 2016, preferred stock buyers have pushed the average price of these securities up by $1.39 per share so far this year, a 9.6 percent annualized value gain for preferred stock investors.

July’s new issues

New preferred stock introductions continue to be robust. After June’s eight new offerings, seven new preferred stocks were introduced during July for the consideration of preferred stock investors.



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.

There are currently 97 high quality preferred stocks selling for an average price of $26.09 (July 31), offering an average coupon of 5.60 percent and a current yield of 5.35 percent. And 12 of these high quality issues are selling below their $25 par value, providing an average yield-to-call of 5.42 percent. 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.

There are now a total of 953 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new shares for wholesale

Note that the two newest issues – ANNPP from Annaly Capital (NLY) and VLYYP from Valley National Bancorp (VLY) - are still trading on the Over-The-Counter exchange (as of July 31). These are temporary OTC trading symbols 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. ANNPP will become NLY-F and VLYYP will become VLY-B.

About the new issues

With the exception of VLYYP, none of July’s new issues are rated. And again with the exception of VLYPP, all offer cumulative dividends, meaning that if the company skips a dividend payment, their obligation to pay you accumulates; they still owe you the money. In such a case, short of a bankruptcy, the company is prohibited from paying dividends to their common stock shareholders until all accumulated dividends owed to their preferred stock shareholders have been paid.

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 (AMH) 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. With the new AMH-G, the company now has seven income securities trading. These issues are unique in that their prospectuses include a provision that allows shareholders to participate in any appreciation of these rental homes over time. Called the “Home Price Appreciation Amount,” these securities’ $25 par value increases over time as published on the company’s website (a variety of exceptions, limitations and conditions may apply). In the event of a redemption, shareholders can actually receive more than the stated $25 par (see “American Homes 4 Rent Preferred Stocks, Opportunities And Risks”).

$50 million of the proceeds from the new TPVY from TriplePoint Venture Growth BDC Corporation (TPVG) are being used to redeem all outstanding shares of the company’s older TPVZ security. Doing so saves the company about $500,000 in annual interest expense with about $15 million in cash left over. Both the old TPVZ and the new TPVY are Exchange-Traded Debt Securities, which are bonds recorded on the company’s books as debt. As such, these “baby bonds” pay interest, rather than dividends, which is therefore taxed as regular income. TriplePoint is incorporated as a Business Development Company, investing in “venture growth stage businesses.”

TWO-B from Two Harbors Investment Corporation (TWO) is the company’s second preferred stock offering within the last four months. While their Series A security was introduced with an 8.125 percent coupon in March at 5.75 million shares, the new TWO-B is composed of a relatively huge 11.5 million shares for the consideration of preferred stock investors. Interestingly, the coupon rates of these two issues, issued a mere four months apart, illustrates an oddity currently playing out within the U.S. preferred stock marketplace – during a period of increasing interest rates, prices, which normally move opposite the direction of rates, have continued to rise as well, putting downward pressure on yields. It is this current oddity that has allowed TWO to issue the new Series B at a substantially lower coupon rate than their Series A just four months ago. As a mortgage REIT, TWO does not own physical property; rather, the company raises capital (such as through a preferred stock offering) that it uses to buy bundles of residential mortgages from financial institutions. If the cost of the raised capital is less than the bundled mortgage rate, mortgage REITs make money on the spread. The cost of investment capital that mortgage REITs are able to raise is determined by today’s prevailing interest rates while the revenue coming from the mortgages, at least to some degree, remains fixed until the mortgages mature. So during a period of increasing interest rates, the profitability of mortgage REITs tends to get squeezed.

CCI-A from Crown Castle International (CCI) was introduced to help fund the company’s pending merger with Lightower Acquisition for $7.1 billion in cash. Crown Castle, a $37 billion company (market cap) with $14 billion in debt, owns an impressive network of wireless communications infrastructure that is leased out to wireless carriers. CCI-A, with a $1,000 par value, is aimed at institutional and commercial investors. This security, raising $1.5 billion, represents significant risk to CCI if the Lightower merger cannot be finalized by its June 29, 2018 deadline. Note too that this security is a mandatory convertible preferred stock, meaning that on the security’s August 1, 2020 call date, these preferred stock shares will convert to the company’s common shares (see prospectus for conversion terms and rates).

UMH-C from UMH Properties (UMH) is one of three preferred stocks currently trading from this company. 3.6 million of the new UMH-C’s 5 million shares will be used to redeem the company’s UMH-A, an 8.25 percent preferred stock originally offered in May 2011. Doing so delivers an annual dividend expense savings of $1.4 million to UMH. After having gone five years without introducing a new preferred stock (its Series A to its Series B), the new UMH-C is the company’s second new offering in the last fifteen months. UMH is a property REIT and is somewhat unique within the U.S. preferred stock marketplace in that it owns and operates manufactured home communities, leasing manufactured home sites to private owners of manufactured homes. UMH is a $500 million company (market cap) founded in 1968.

Of the four preferred stocks that Annaly Capital currently has trading, the new ANNPP/NLY-F is the company’s largest by far. At 28 million shares, this security has raised about $700 million for NLY. About $200 million of these proceeds will go to redeem their 7.875 percent NLY-A. The company has announced no plans to redeem any of their other three preferreds, even though the new NLY-F leaves them with plenty of cash to do so. According to Annaly’s press release, the remaining $500 million will go to “…acquire targeted assets under the Company’s capital allocation policy, which may include further diversification of its investments in Agency assets as well as residential, commercial and corporate credit assets.” Like TWO-B, this security offers a fixed-to-float rate, meaning that it pays a fixed 6.95 percent coupon until its September 30, 2022 call date. At that time, the coupon rate becomes variable, pegged to the 3-month LIBOR rate (currently 1.30072 percent) plus 4.993 percent.

VLYYP/VLY-B from Valley National Bancorp (VLY) is the only rated preferred stock to be introduced during July, albeit a lackluster BB+ from S&P. Founded in 1927, the bank operates 209 branches primarily in New York and Florida, making it virtually unknown to the rest of the country. VLYYP is the company’s second preferred stock offering, with VLY-A introduced at 6.25 percent in 2015. As with most recent bank-issued preferreds, VLYYP pays non-cumulative dividends with a fixed-to-float rate structure. This security pays a 5.5 percent dividend until its June 30, 2022 call date. At that time, the coupon rate will be pegged to the 3-month LIBOR rate plus 3.578 percent.

(Sources: Prospectuses AMH-G, TPVY, TWO-B, CCI-A, UMH-C, ANNPP/NLY-F, VLYYP/VLY-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 VLYYP 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 July issues stack up within the context of today’s preferred stock marketplace?

We’re all taught that during a period of increasing rates the market prices of fixed-return securities (bonds, preferred stocks) will tend to decrease, moving in the opposite direction of rates.

But for many months now, two of the most significant contributors to upward price pressure have been (1) continued zero-to-negative rates implemented by foreign central banks and (2) insensitivity by member banks toward changes in the federal funds rate. As they have since the Fed started raising rates in December 2016, preferred stock buyers continued to totally ignore today’s upward pressure on rates throughout July.


Demand for U.S.-traded preferred stocks has remained high, as indicated by the continuation of increasing prices, despite the rate hikes. The average market price of U.S.-traded preferred stocks is now at $26.11 per share, an annualized value increase of 9.6 percent for 2017.

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.

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 6.4 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 2.3 percent and that of the 2-year bank CD is a meager 1.8 percent.



For comparison, I have set the Yield column in the first table above to show the current yield of the new July preferreds on July 31. It is into this marketplace that July’s new issues were introduced.

Income versus Value Investing, Year-To-Date

With an average current yield of 6.4 percent, plus the 9.6 percent annualized value gain, those investing in U.S.-traded preferred stocks since the beginning of 2017 are currently on pace for a total annualized return of 16.0 percent (6.4 percent of which is realized in dividend cash).

Starting at 2252 at the beginning of the year (January 3, 2017 open), the S&P500 common stock value index closed on July 31 at 2470, an unrealized annualized value gain of about 16.6 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 18.6 percent for common stock investors.










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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 95 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).













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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.