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JULY 2017

Issue 124


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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 6.3 percent Yield-To-Call in today's preferred stock marketplace and there are now 16 of these gems to pick from.

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 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 955 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 955, 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.

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, June 2017


Preferred stock investors have ignored the last three interest rate hikes from the Federal Reserve. Despite three rate hikes over the last seven months, preferred stock buyers have pushed the average price of these securities up by $1.23 per share so far this year, a 10.0 percent annualized value gain for preferred stock investors.

June’s new issues

Eight new preferred stocks were introduced during June for the consideration of preferred stock investors, the most robust monthly offerings so far this year.

There are currently 100 high quality preferred stocks selling for an average price of $25.92 (June 30), offering an average coupon of 5.60 percent and a current yield of 5.40 percent. And 16 of these high quality issues are selling below their $25 par value, providing an average yield-to-call of 6.04 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.



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 now a total of 955 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).


Buying new shares for wholesale


Note that the two newest issues – CMMPP from Compass Diversified Holdings (CODI) and PNNMP from PennyMac Mortgage (PMT) - are still trading on the Over-The-Counter exchange (as of June 30). 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. CMMPP will become CODI-A and PNNMP will become PMT-B.

About the new issues

RILYZ from B. Riley Financial (RILY) is the company’s second income security offering within the last seven months, their RILYL being introduced last November. While June’s RILYZ raised over twice the capital as last November’s RILYL ($52.5 million versus $25 million, respectively), the two securities are nearly identical – both are Exchange-Traded Debt Securities (baby-bonds, so pay cumulative interest), offer a 7.5 percent coupon, are unrated and use the same quarterly interest payment schedule. Founded in 1973, B. Riley is a financial services company, offering a wide variety of services to commercial and high net worth clients throughout the U.S. and Europe.

OXLCM, an unrated traditional preferred stock offering cumulative dividends, was introduced by Oxford Lane (OXLC) with a 6.75 percent coupon in early June. OXLCM’s 2.5 million shares raised just over $60 million but brings with it a $4.2 million annual dividend expense obligation. The company is using about $28 million of the OXLCM proceeds to redeem all 1.12 million outstanding shares of their older OXLCN. While the new OXLCM delivers a dividend cost savings per share over the older OXLCN, the new OXLCM was issued for twice the number of shares, increasing the company’s annual dividend expense by about $2 million. From their website “Oxford Lane Capital Corp. is a publicly-traded registered closed-end management investment company. It currently seeks to achieve its investment objective of maximizing total return by investing in securitization vehicles which, in turn, primarily invest in senior secured loans made to companies whose debt is rated below investment grade or is unrated.”

NGL-B from NGL Energy Partners LP (NGL) is probably the most complex security among June’s new offerings. NGL, a newcomer to the preferred stock market, is a limited partnership so owning shares of its equity securities, such as NGL-B, has tax and reporting consequences to shareholders (see tax advisor). Further, this security has the fixed-to-floating rate structure meaning that its coupon rate starts out at a fixed 9.0 percent until its July 1, 2022 call date. At that time, NGL-B becomes a variable rate security with its coupon equal to the then-current three-month LIBOR rate (currently at 1.21806 percent) plus 7.213 percent. Buyers should remember that having this variable rate structure kick in on the day the security becomes redeemable is not an accident. Historically, issuers will frequently redeem the shares if the coupon adjustment is going to result in a significantly increased dividend expense.

MH-D, a traditional preferred stock issued by Maiden Holdings (MHLD) on June 8 at 6.7 percent, is one of three June preferred stocks that are rated by S&P, offering a BB rating. MH-D’s 6 million shares raised about $150 million for the company. With the introduction of the new MH-D, Maiden Holdings redeemed all outstanding shares of their 8.0 percent MHNB baby bond on June 27, leaving the company with five remaining income securities trading on U.S. stock exchanges. Since MHNB, now redeemed, was an Exchange-Traded Debt Security, this maneuver converted $100 million of MHNB debt into equity on the company’s books, improving its debt-to-equity ratio. Maiden is a property and casualty insurance company founded in 2007 and domiciled in Bermuda.

VR-B from Validus Holdings (VR) is one of two investment grade preferred stocks offered during June (Baa3/BBB-). This non-cumulative traditional preferred stock offers a 5.8 percent coupon and is almost identical in its terms to the company’s VR-A security offered at 5.875 percent a year ago except that the new VR-B is substantially larger (raising $250 million versus VR-A’s $150 million). VR is a holding company for an array of subordinate companies (including Validus Reinsurance, Ltd., Talbot Holdings Ltd., Western World Insurance Group, Inc. and AlphaCat Managers, Ltd.) most of which are in the reinsurance or direct insurance business. Validus was founded in 2005 and, like Maiden Holdings, is domiciled in Bermuda.

SCE-L, a double-investment grade trust preferred stock paying 5.0 percent cumulative dividends, is issued by Southern California Edison, a subsidiary of Edison International (EIX). The 19 million shares of SCE-L raises $475 million, all of which will be used to redeem all outstanding shares of the older 5.625 percent SCE-F on July 19.

CMMPP/CODI-A, offered by Compass Diversified Holdings (CODI) at 7.25 percent, is an unrated traditional preferred stock paying non-cumulative dividends. Similar to NGL, CODI is a master limited partnership so owning shares of its equity securities, such as CMMPP, has tax and reporting consequences to shareholders (see tax advisor). The $100 million proceeds from CMMPP will largely go toward paying down the company’s debt in the wake of its June 2017 agreement to acquire Crosman Corporation (sporting equipment). Compass acquires and manages small to middle market U.S. businesses with stable and growing cash flows. The company was founded in 2005 and is headquartered in Connecticut.

PNNMP/PMT-B issued by PennyMac Mortgage (PMT), is the company’s second preferred stock issue this year, raising a net of $170 million on June 27. As a mortgage REIT, PennyMac does not own physical property; rather, PMT 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 (8.0 percent in the case of the new PNNMP) 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. In PennyMac’s case, this mechanism can be amplified since the company specializes in distressed mortgage loans for its revenue.

(Sources: Prospectuses RILYZ, OXLCM, NGL-B, MH-D, VR-B, SCE-L, CMMPP/CODI-A, PNNMP/PMT-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 MH-D, VR-B and SCE-L 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 June 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.

On June 14, the Fed’s Open Market Committee raised interest rates for the third time in seven months. And, for the third time in seven months, preferred stock buyers reacted with a collective yawn.


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 $25.95 per share, an annualized value increase of 10.0 percent for 2017.

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.

Foreign investors continue to be attracted by U.S. income securities since they are facing zero-to-negative rates at home. This foreign demand puts upward pressure on prices here. And U.S. banks are holding over $2 trillion in excess reserve cash - that's above and beyond the elevated 2010 Dodd-Frank requirements. The demand by member banks for overnight loans from the Fed has been, and remains, minimal, rendering changes to the federal funds rate less compelling. Coming out of their June meeting, however, the Fed announced that it will launch a new program to deal with these excess reserves. If successful, doing so should make federal funds rate adjustments more effective.

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 6.5 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 2.2 percent and that of the 2-year bank CD is a meager 1.7 percent.



For comparison, I have set the Yield column in the first table above to show the current yield of the new June preferreds on June 30. It is into this marketplace that June’s new issues were introduced.

Income versus Value Investing, Year-To-Date

With an average current yield of 6.5 percent, plus the 10.0 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 16.5 percent (6.5 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 June 30 at 2423, an unrealized annualized value gain of about 15.2 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 17.2 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.