Even plain vanilla index funds do well in bull markets, but the blend of features offered in high-yield preferred stocks from publicly traded companies such as Public Storage (NYSE: PSA) and CHS Inc. (NYSE: CHS) are attractive for many financial settings.
Preferred stocks are a hybrid security with elements of stocks and bonds. Compared to common shares, preferred stocks offer:
- A higher yield
- A better position for dividends, with a preference over the common stock of the issuer
- A superior claim to the assets of the company in the event of bankruptcy
Preferred stocks, it should be noted, are often “callable,” meaning that the issuer has the right to redeem the stock at a preset price after a defined date.
Preferred stock issues from Public Storage, a storage real estate investment trust, and CHS, a Fortune 100 farming co-op, are examples of alluring short-term and long-term plays.
Public Storage is the largest operator of storage units in the world, with almost 2,400 locations in 38 U.S. states and seven European countries.
The Public Storage Preferred Stock, Series T (NYSE: PSA-T) issue is attractive for a variety of reasons. Its facilities are doing well, as more people are renting rather than owning, which increases the demand for storage. Public Storage has also increased revenues five years in a row. That leaves little doubt that the preferred stock payments will be fully funded.
The yield for the common shares of Public Storage is 2.84%. The PSA-T preferred shares are now yielding more than 5.6%. The 52-week high for the preferred shares is $26.00, with the 52-week low being $23.01. At present, it is in the $25.40 range. The redemption date is March 13, 2017.
For investors with long-term goals, there is the CHS Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 (NASDAQ: CHSCM). The 52-week high is $26.50, and the 52-week low is $24.10 for the CHSCM preferred stock issue. It is now trading around $26.00, with a dividend yield of about 6.5%. There can be no call until September 30, 2024.
|Ticker||Redemption Date||Call Price||Current Yield||Average Volume (thousands)||Suitability|
|CHSCM||September 30, 2024||$25.00||6.5%||8.15||Long-term, such as retirement income|
|PSA-T||March 13, 2017||$25.00||5.6%||31.45||Short-term, such as tuition or home down payment|
Mutual funds and exchange-traded funds featuring preferred stocks also have much to offer. These securities bring professional management and a diversity of assets that are very difficult for individual investments to match. Some take care of management concerns, such as ratings and call dates (for a fee, of course).
If an individual wants to trade preferred stocks, ETFs offer higher volumes, too, along with high yields. The Global X SuperIncome Preferred ETF (NYSEArca: SPFF) has a yield of around 6.7%, along with a daily volume of over 180,000 shares.
The iShares US Preferred Stock (NYSEArca: PFF) boasts a dividend yield of nearly 6.2%, with a daily volume of over 2 million shares. The higher volume makes capture-the-dividend plays more feasible, due to the tighter spreads. Greater liquidity keeps the bid-ask spread tight, facilitating trading and keeping transaction costs low.
A number of mutual funds with preferred stock holdings have also turned in strong performances:
|One-Year Performance||Five-Year Performance||Expense Ratio|
|Forward Select Income Fund (KIFAX)||16.23%||12.21%||1.64%|
|Cohen & Streets Preferred Securities and Income Fund (CPXAX)||11.40%||10.78%||1.15%|
|Nuveen Preferred (NPSAX)||8.0%||10.60%||1.07%|
When the stock market is trading sideways, preferred stocks will generally outperform. Here the dividend yield provides the difference.
As an income security, preferred stocks will have more stable ownership, too. These shareholders are in it for the yield and want to hold on for the income, so selling typically does not take place when the stock price fluctuates. The call price provides a floor with a target date, too, which stabilizes the share price for preferred stock issues. The low volumes are evidence.
So, what’s a savvy income investor to do?
For those with near-term goals, preferred stock ETFs and mutual funds, and individual issues with call dates approaching can work. The diversity of assets in an ETF or mutual fund makes them less volatile. The impending call date will stabilize a preferred stock, bringing it closer to the call price as the date nears.
Long-term investors should scout for preferred stocks that:
- Have a strong common stock dividend history
- Have a compelling dividend yield for the preferred issue
- Dip below $25 a share or the stated call price
- Have call dates that are suitable for the objectives
Companies with a history of paying preferred stock dividends and redeeming on schedule can provide investors with robust long-term total rewards. ETFs and mutual funds that invest in preferred stocks, on the other hand, bring professional management and the resources of institutions.
Short-term buyers and long-term investors have much to like, and much to choose from, in the preferred stock sector.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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