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JUNE 2017

Issue 123


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by Doug K. Le Du


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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 6.8 percent Yield-To-Call in today's preferred stock marketplace and there are now 25 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 959 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 959, 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, May 2017


Preferred stock investors have ignored the last two interest rate hikes from the Federal Reserve. Despite two rate hikes over the last six months, preferred stock buyers have pushed the average price of these securities up by $1.10 per share so far this year, a 10.7 percent annualized value gain for preferred stock investors. The Federal Reserve’s Open Market Committee will hold their next two-day meeting on June 13-14.

May’s new issues

Five new preferred stocks were introduced during May for the consideration of preferred stock investors.

There are currently 102 high quality preferred stocks selling for an average price of $25.73 (May 31), offering an average coupon of 5.60 percent and a yield-to-call of 3.87 percent (although calls of these relatively low coupon issues is becoming less likely). And 25 of these high quality issues are selling below their $25 par value, providing an average yield-to-call of 6.81 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.

But with 25 high quality issues currently available for less than their $25 par value to pick from, the number of new preferred stock IPOs becomes much less relevant to today’s buyers.



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 959 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new shares for wholesale

Note that the two newest issues – PBSPP from Public Storage (PSA) and CLNYP from Colony NorthStar (CLNS) - are still trading on the Over-The-Counter exchange (as of May 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. PSBPP will become PSA-F (see cautionary note below) and CLNYP will become CLNS-I.

About the new issues

All five of May’s new issues offer cumulative dividends, meaning that if the issuing company skips a dividend payment to you, they still owe you the money; their obligation to pay you accumulates.

AI-B from Arlington Asset Investment Corporation (AI) is the company’s first preferred stock, although they also have two Exchange Traded Debt Securities currently trading. AI is a small cap company ($341 million), making its money by leveraging their portfolio of primarily residential mortgage backed securities. Somewhat uniquely, the company has chosen to not incorporate as a mortgage REIT. AI-B is a very small issue of 135,000 shares raising just over $3 million.

GLOP-A, issued by GasLog Partners LP (GLOP), is May’s only fixed-to-float security, meaning that it pays a fixed 8.625 percent dividend until its June 15, 2027 call date. The rate becomes variable at that time, calculated by adding 6.31 percent to the then-current three-month LIBOR rate (currently at 1.17372 percent). GasLog, founded in 2014 and headquartered in Monaco, charters its fleet of nine LNG tankers. GLOP-A is the company’s first and only income security. With total 2016 gross revenue reported at $229 million, the $125 million raised by GLOP-A represents about half of this company’s annual sales volume. Note that GasLog is structured as a foreign limited partnership. Those considering buying GLOP-A shares should consult a tax specialist regarding the taxation and reporting requirements of income from such securities.

BDXA from Becton Dickson and Company (BDX) is easily the most complex preferred stock issued during May. BDXA is a “term, mandatory convertible preferred stock,” meaning that it will only trade for a specific term (until its May 1, 2020 call date) and on that date, the shares will convert from preferred stock shares to the company’s common stock shares, the conversion ratio formula being specified within the security’s prospectus. Note that this conversion is mandatory, meaning that the preferred shares will convert to common shares whether or not the conversion is beneficial to shareholders. This security also includes a provision stating that prior to its May 1, 2020 call date, shareholders may convert their BDXA shares to BDX common shares at the option of the shareholder. BDX is a $43 billion (market cap) medical supply company founded in 1897. BDXA is the company’s only income security.

The new “Series F” PBSPP is the newest of 14 preferred stocks from Public Storage currently trading. PSA offers the highest rated preferred stocks of any U.S. REIT (A3/BBB+), which explains the miserly 5.15 percent coupon of this new issue. Typically, PSA uses the proceeds from a new, lower paying preferred to redeem the shares of an older, higher payer. But while three of PSA’s 14 currently-trading preferreds are redeemable (PSA-S, -T and –U), the new PBSPP only generates enough cash to redeem the lowest payer of the group, PSA-U at 5.625 percent. PSA favors preferred stock issuance over debt to raise capital. Consequently, over any five-year call period, the company issues so many preferred stocks that the NYSE frequently finds itself having to issue the same trading symbol for the new security as one that has been recently redeemed by the company (e.g. PSA-A, PSA-F). As discussed earlier, PBSPP is a temporary OTC trading symbol with this Series F security being destined to become PSA-F in early-June. But since PSA-F was the symbol used by a PSA preferred stock introduced in 2005 and redeemed in 2012, those researching this new issue should be certain that you are looking at information for the new security.

CLNYP from Colony NorthStar is an unrated traditional preferred stock offering a 7.15 percent cumulative dividend. The proceeds from CLNYP (a 12 million share issue) will be used by CLNS to redeem two of the company’s older preferreds – CLNS-A (2.2 million shares initially issued by NorthStar Realty at 8.75 percent) and CLNS-F (5.2 million shares at 8.5 percent issued by Colony Financial). This move will leave the company with about $115 million in left over CLNYP cash plus an annual dividend expense savings of about $5.6 million. Colony NorthStar is an $8.3 billion (market cap) diversified REIT founded in 2009 and invests in a wide range of commercial and residential real estate throughout North America and Europe.

(Sources: Prospectuses AI-B, GLOP-A, BDXA, PBSPP/PSA-F, CLNYP/CLNS-I. 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 Arlington Asset’s AI-B, GasLog’s GLOP-A and Becton’s BDXA 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 May issues stack up within the context of today’s preferred stock marketplace?

After the Fed’s December 2015 rate hike, market prices of income securities predictably fell, at least for about eight weeks. But throughout 2016, skeptical income investors came to doubt that the rate hike of the previous December was anything more than a one-shot deal; prices shot up shortly thereafter by an average $3.05 per share, all the way to $26.40 per share.

Similarly, anticipating a Q4 2016 hike, sellers started selling their shares in August 2016 with the expected rate hike becoming a reality in December 2016. But notice in the next chart how income investors starting pushing prices back up immediately following the December 2016 hike.


On March 15, 2017 the Fed raised the federal funds rate for the second time within four months, but income investors remain undeterred. 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 $25.82 per share, an annualized value increase of 10.7 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.

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 1.6 percent.



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

Income versus Value Investing, Year-To-Date

With an average current yield of 6.5 percent, plus the 10.7 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 17.2 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 May 31 at 2411, an unrealized annualized value gain of about 16.9 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 18.9 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.