Great Resources for Preferred Stock Investors!





MAY 2017

Issue 122


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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 6.0 percent Yield-To-Call in today's preferred stock marketplace and there are now 27 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 954 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 954, 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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How Preferred Stock Investors Can Keep Up With Increasing Rates


A period of increasing rates is great for preferred stock buyers - the higher coupons that come with increasing rates puts more money in your pocket. But as rates go up, prices for older, lower payers go down which can be bad news for those intending on selling their previously purchased preferred stock shares.

With the Fed increasing the federal funds rate twice over the last five months – with additional increases predicted to be on the horizon – the technique that I describe here allows preferred stock investors to turn the known inverse relationship between rates and prices to your advantage during such periods.

During periods of upward pressure on interest rates, we often see what I refer to as “upgrade” opportunities. Upgrading takes advantage of market price disparities that tend to occur during periods of increasing rates.

Increase income and cash

Upgrading involves selling a lower-paying preferred stock that you own and using the proceeds to buy a higher payer of similar quality, keeping pace with increasing rates, but for a lower price. The result is that (a) your dividend income will increase and (b) you will have cash left over.

There are literally dozens of such opportunities with U.S.-traded preferred stocks right now.

All you need is a list of preferred stocks that are similar to a lower payer that you own, sorted by their current market price. I will use data from April 26 to illustrate how upgrading a lower-paying preferred stock is done.

Example: Wells Fargo’s Series R Preferred Stock (WFC-R)

Let’s say that I own WFC-R from Wells Fargo (WFC), which I purchased at par ($25) back when WFC-R was issued in 2013.

WFC-R is a non-cumulative, call-protected, investment grade traditional preferred stock currently paying a fixed quarterly dividend of 6.625 percent that qualifies for favorable tax treatment (Qualified Dividend Income – QDI).

First, we need a list of preferred stocks that are very similar to WFC-R. Preferred stocks have a variety of characteristics so I want to be sure that I am comparing apples to apples as much as practical. Here is how I configured the search engine’s 25 preferred stock characteristics to find such a list:



The resulting preferred stocks are all very similar to WFC-R: call-protected for several years, are not convertible to any other type of security, have a $25 par value, are currently paying a fixed-rate dividend, pay tax-advantaged (QDI) quarterly dividends, are issued by U.S. companies and offer a Moody’s investment grade rating.

Of the 954 preferred stocks and Exchange-Traded Debt Securities currently trading on U.S. stock exchanges, 83 meet the search results seen above.

Of these 83, I will use 10 here as examples to illustrate how to upgrade a lower-paying preferred stock. These preferred stocks are all very similar and are issued by Wells Fargo, US Bancorp (USB), KeyCorp (KEY), Edison International/Southern California Edison (EIX), JP Morgan (JPM), Allstate (ALL), First Republic Bank (FRC) and Bank of America (BAC).



In this list of 10 preferred stocks, there are 23 upgrade opportunities. Can you spot them?

Here’s the trick

A table with no upgrade candidates, once sorted by their current market price, highest to lowest, will also show the dividend rates in sorted order, highest to lowest.

But notice that that is not the case here. The Div Rate column starts out okay—6.625 percent down to 6.500 percent, then down to 6.125 percent and on to SCE-H’s 5.750 percent; so far, so good. But then, after SCE-H’s 5.750 percent, the next Div Rate is higher. We go from SCE-H’s 5.750 percent up to JPM-B’s 6.700 percent.

Bingo. WFC-R for JPM-B is our first upgrade candidate. And all you need is a list of preferred stocks sorted by market price (highest to lowest) to spot them. Keep an eye on the above table and I will walk you through the upgrade of WFC-R to JPM-B.

If you own shares of WFC-R, which pays 6.625 percent, you could sell them for $29.73 and use the proceeds to buy JPM-B at $27.70. JPM-B pays a higher 6.700 percent dividend rate, increasing your dividend income by 0.075 percent, plus you will have $2.03 per share in cash left over.

Notice that in this upgrade you are paying $27.70 for JPM-B.

Preferred stock investors should avoid purchasing shares for a market price above the security’s $25 par value. Purchasing JPM-B at $27.70 exposes you to a potential capital loss of $2.70 per share in the event that JP Morgan calls JPM-B downstream.

But what if you were reimbursed for any potential future capital loss in advance? Remember, you have $4.73 per share in your pocket right now from your sale of WFC-R (since you originally paid $25 per share for your WFC-R shares). That’s more than enough to reimburse the $2.70 capital loss in the event that JP Morgan calls JPM-B someday.

You have already been reimbursed for any future capital loss on the JPM-B shares and will still have $2.03 per share in cash left over, even if they do so.

Results – something for every investor

Here are the 23 upgrade opportunities from the above list of 10 examples and the results from each.



Look down the Results columns (far right) and notice how different upgrades can appeal to different investors.

Those seeking to maximize their cash position would focus on upgrade number 4 since it improves their cash position by a whopping $2.56 per share.

Alternatively, investors looking to improve their risk profile would favor upgrade #13 since it trades in a Baa3 rated security (KEY-I) for one with a higher Baa2 rating (ALL-E).

Lastly, investors looking to maximize their dividend income would find upgrade number 16 appealing since it improves dividend income by 0.875 percent.

Each of these 23 upgrades involves trading in a lower-paying preferred stock for a very similar higher-paying security and each opportunity leaves you with cash left over.

Using this simple technique can provide preferred stock investors with a way to make very beneficial adjustments to their income portfolio during a period of increasing interest rates.










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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).













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.