Should You Buy These High Yield Preferred Stocks?

Don’t get caught chasing a high yield for a bad stock.

I’m a big fan of preferred stocks.  It is a perfect cross between a company’s stock and its bonds.  Stock gives you company ownership.  Bonds allow you to be a lender to the company.  In our system, lenders always take priority over owners.  If the company goes bankrupt, the shareholders tend to get wiped out whereas the bondholders usually recover something.

preferred-stocks

Preferred stock is right in the middle.  It gives you quasi-ownership, but no voting rights.  It trades more like a bond, in a tight range without much volatility.  It pays interest at higher rates than bonds because they carry slightly more risk.  In a bankruptcy, the bondholders get paid out first, but the preferred holders take the next bite of the apple.

With bonds, if a company misses an interest payment, bondholders can seize the company. Preferred stockholders have no such power but they have an advantage over the common shareholders, in that the common stock dividend must be suspended first before the preferred stock dividend gets altered.

Preferred yields are very tempting as it is, so there’s usually no need to chase yield.  However, some yields are very high and very tempting.  We don’t want to throw out the baby with the bathwater if the preferred stock is a good one.

The National Bank of Greece (NYSE:NBG) is listed on the NYSE.  If you’ve been following the news about sovereign debt, you know Greece is in a world of trouble.  The country is broke.  However, its banks have raised capital and should survive the next stress test.  It has received two bailout packages.

The stock itself trades at only $2.60, down almost 90% from its high.  If you were to buy the common, you are basically buying into the notion that the bank and country will survive going forward.

If you buy the preferred shares, you’d get them at $16.76 per share.  Their par value is $25, which puts you in an interesting situation.  Right now, the bonds do not pay their preferred shareholders its 9% dividend.  It may reinstitute it at some point, or it may choose to redeem the shares for $25, giving you a nice big gain.  It would redeem them if it wanted to avoid paying dividends.

Speculative investors may want to consider this.

Supertel Hospitality (NASDAQ:SPPR) is a hotel REIT that’s fallen on hard times.  Its 47 hotels are generating better revenues, but still struggling on the earnings front.  It has been selling assets to hold onto solvency.  It has been preserving capital and so has suspended dividends on the common and all three classes of preferred shares.

The intriguing play is whether the company can regain its footing.  If so, its’ series 8% shares (NASDAQ:SPPRP) may begin paying again, and if they do, then unlike NBG, the missed dividend payments are cumulative and get paid out once dividends resume.Those shares trade at a mere $7.11.  So if the dividends resume, the preferred will instantly shoot upwards, and perhaps they will redeem them at $25 as well.

Lawrence Meyers does not own shares in any security mentioned.

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