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APRIL 2018

Issue 133


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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



Preferred stock prices have finally started to come down, offering income investors higher yields for bargain prices. There are currently 120 high quality preferred stocks selling for an average price of $24.94 per share (investment grade, cumulative dividends). 62 of these high quality issues are now selling below their $25 par value, offering an average current yield of 5.4 percent.

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 893 preferred stocks and ETDs trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 893, 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, March 2018


The March 21 hike in the federal funds rate had the predicted result on preferred stock market prices, pushing yields up and prices down just prior to, as well as after, the announcement. After February’s lull in new preferred stock introductions, March was a more normal month in that regard with eight new issues.

March’s new issues

March’s eight new preferred stocks are offering an average annual dividend (coupon) of 6.8 percent. Here are the eight new issues introduced during March 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.

A special note regarding preferred stock trading symbols: Annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers and other online quoting services for preferred stock symbols is not standardized. For example, the Series A preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others but this same security is “PSA.PR.A” at E*Trade. For a cross-reference table of how preferred stock symbols are denoted by sixteen popular brokers and other online quoting services, see “Preferred Stock Trading Symbol Cross-Reference Table.

There are currently 120 high quality preferred stocks selling for an average price of $24.94 (March 30), offering an average current yield of 5.53 percent. And 62 of these high quality issues are selling below their $25 par value offering an average current yield of 5.4 percent. By high quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings and cumulative dividends.

There are now a total of 893 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new shares for wholesale

Note that CNNLP from CAI International (CAI) and ALLSP from Allstate (ALL) are still trading on the wholesale Over-The-Counter exchange (as of March 30). These are temporary OTC trading symbols until these securities move to the NYSE exchange, 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. CCNLP will become CAI-A and ALLSP will become ALL-G.

About the new issues

The March issues have several things in common, but each are also unique in their own way.

CMSA from CMS Energy Corp. (CMS) is an Exchange-Traded Debt Security, also referred to as a baby bond. ETDS’ are bonds recorded on the company’s books as debt (rather than as equity, as in the case of preferred stock). As debt, the obligation to pay the interest on these bonds is cumulative. As bonds, ETDS’ are often seen as having lower risk than the same company’s preferred stock shares. ETDS are very similar to preferred stocks and are often listed on brokerage statements as such. CMSA is one of two March issue to offer double investment grade ratings. CMS is the largest electric and natural gas utility in Michigan through its principal subsidiary Consumers Energy Company.

AIZP, issued by Assurant, Inc. (AIZ), has a $100 par value and is part of the insurer’s plan to raise the capital for its pending acquisition of TWG Holdings, Inc. The plan also includes the issue of Senior Notes due 2023, Senior Notes due 2028 and its Fixed-to-Floating Subordinated Notes due 2048. AIZP is a very complex and non-standard security in many ways, so be sure to read the prospectus carefully. The security includes both mandatory and optional conversion provisions, and the company may prematurely redeem your shares if the pending acquisition of TWG Holdings is not finalized by the end of 2018.

CODI-B from Compass Diversified Holdings (CODI) is an unrated traditional preferred stock using the fixed-to-floating dividend rate structure. With this structure, this security offers a fixed 7.875 percent coupon until its April 30, 2028 call date. At that time, the coupon varies based on the three-month LIBOR rate (currently 2.02457 percent) plus 4.985 percent. CODI is a $1 billion (market cap) private equity company established in 2005, investing in middle market companies.

QTS-A is an unrated traditional preferred stock issued by QTS Realty Trust (QTS). QTS is a property REIT specializing in data center properties. QTS-A, the company’s first preferred stock issue, offers 7.125 percent cumulative dividends. Cumulative dividends means that if the company skips a dividend payment to you, their obligation to pay you accumulates (they still owe you the money).

APO-B, issued by global investment manager Apollo Global Management (APO), is an investment grade (S&P BBB+) tradition preferred stock offering a 6.375 percent coupon and non-cumulative dividend (if the company misses a dividend payment, they are not obligated to ever pay it). APO-B is Apollo’s second preferred stock issued within the last thirteen months, both of which are virtually identical – same coupon, non-cumulative dividends, and five years to call date with no maturity date (perpetual).

TSCAP is an unrated, non-cumulative traditional preferred stock offered by TriState Capital Holdings (TSC). TSC is a holding company for TriState Capital Bank, a regional bank operating in the northeastern United States, established in 2007. TSCAP has a fixed-to-floating rate structure, initially offering a 6.75 percent fixed annual dividend until its April 1, 2023 call date. At that time, the rate becomes pegged to the three-month LIBOR rate plus 3.985 percent.

CNNLP/CAI-A, issued by CAI International offers a fixed-to-floating rate structure similar to TSCAP, with an 8.5 percent coupon that is fixed until the security’s April 15, 2023 call date. At the time, the dividend rate will vary based on the 3-month LIBOR rate plus 5.82 percent. CNNLP/CAI-A is the company’s first preferred stock, is unrated, but offers cumulative dividends. CAI was founded in 1989 and operates as a transportation lending and logistics company in San Francisco.

ALLSP/ALL-G is from Allstate Corp., the insurer’s seventh preferred stock issue in five years and the first since June 2014. ALLSP/ALL-G offers double investment grade ratings. The 5.625 percent dividends are non-cumulative and the shares become callable on April 15, 2023.

Sources: Preferred stock data - CDx3 Notification Service database, Prospectuses CMSA, AIZP, CODI-B, QTS-A, APO-B, TSCAP, CNNLP/CAI-A, ALLIS/ALL-G

Tax treatment

The tax treatment of the income you receive from income securities can be a bit confusing, but it really boils down to one question – Has the company already paid tax on the cash that is being used to pay you or not? If not, the IRS is going to collect the full tax from you; if so, you still have to pay tax, but at the special 15 percent rate.

With that rule in mind, here is how the tax treatment of February’s new issues plays out.

Companies incorporated as REITs (QTS-A) are required to distribute at least 90 percent of their pre-tax profits to shareholders. Doing so in the form of non-voting preferred stock dividends is the most common method of complying and because these dividend payments are made from pre-tax dollars, dividends received from REITs are taxed as regular income (i.e. they do not qualify for the special 15 percent dividend tax rate).

Interest that a company pays to those loaning the company money is a business expense to the company (tax deductible), so the company does not pay tax on the interest payments it makes to its lenders (i.e. interest payments made to lenders are paid with pre-tax dollars). Since Exchange-Traded Debt Securities are debt (CMSA), ETDS shareholders are on the hook for the taxes. Income received from ETDS’ is taxed as regular income.

Lastly, if a company pays your preferred stock dividends out of its after-tax profits, the dividend income you receive is taxed at the special 15 percent tax rate. Such dividends are referred to as “Qualified Dividend Income” or QDI. QDI preferred stocks are often seen as favorable for holding in a non-retirement account due to the favorable 15 percent tax treatment. Looking at the Status column in the above table, dividends received from AIZP, TSCAP, CNNLP/CAI-A and ALLSP/ALL-G 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

As expected, to keep inflation in check, the Federal Open Market Committee increased the federal funds rate at their March 20-21 meeting. For preferred stock investors, upward pressure on interest rates finally reached a tipping point with the signing of the Tax Relief and Jobs Act on December 20, 2017, delivering a long-awaited income boost to today’s preferred stock buyers.

Interest rates and the prices of fixed-returned income securities move in opposite directions – rates up, prices down. Take a look at what U.S. preferred stock prices have done since the middle of last year.


Preferred stock buyers are finally getting some price relief. The lower prices that come with increasing interest rates boost portfolio yields for income investors.

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.

Moving down the risk scale, the next chart shows the dramatic increase in current yield realized by today’s preferred stock buyers when compared to the yield earned by those investing in the 10-year treasury note or 2-year bank Certificates of Deposit.
U.S.-traded preferred stocks are currently returning an average current yield of 6.7 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 2.7 percent and that of the 2-year bank CD is a meager 2.4 percent.



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










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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 98 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


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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.