4 Preferred Stocks for the Everyday Investor

preferred-stocksNo expertise needed for these preferred stocks.

At this point, preferred stocks are not the mystery they once were to investors.  The necessity for yield has opened up doors to all kinds of investments that people never looked at closely before.  Preferred stocks are nothing to be afraid of.

Just think of preferred stock as a cross between and a bond and a stock. A bond is a loan where the investor gets an interest payment in exchange for the loan. Debt always has the highest position for recovery of principal if the company files for bankruptcy.

Preferred stocks allow a company to raise money without diluting the ownership of other shareholders, while also allowing current bondholders to maintain their position in the capital stack. Preferred stock doesn’t have voting rights, but offers dividend payments that are often higher than bonds themselves.  That’s because preferred stock carries more risk than bonds, but less than the common stock.

That’s all there is to it.  The best part is that preferred stock tends to trade in tight ranges like bonds do, so there is little volatility, but a high yielding dividend.  Although some preferred stocks require extensive knowledge of the underlying business, I’ve chosen four preferred stocks that are easy to understand.

Ashford Hospitality Trust (NYSE:AHT)

Ashford Hospitality Trust (NYSE:AHT) has an 8.45% Series D preferred stock that you can trade.  It was actually the first preferred stock I ever owned.  The hotel business is pretty simple to understand.  Hotel REITs take down debt to build or buy hotels.  Then they must generate enough revenue in excess of expenses to have positive free cash flow, of which 90% gets paid to common shareholders after preferred shareholders get paid.

Hotels are all about managing debt and liquidity, buying the right hotels at the right price, managing them properly, and taking advantage of pricing power when the economic environment permits.  Right now, hotel demand exceeds supply, so there are more hotels that need to be built, and room rates are rising.

Ashford was the only hotel REIT I know of that did not suspend its preferred dividend in the financial crisis.

Public Storage (NYSE:PSA) 

Public Storage (NYSE:PSA) has a 6.5% Series Q preferred stock.  I love Public Storage as a company.  It’s not terribly different from hotels, though it’s actually more akin to timeshares.  A storage company draws down debt to build its facility, then rents out its units.  Sometimes the rental is short term and other times it is for longer term.

Storage need is on the rise because a lot of people got kicked out of their homes during the housing crisis.  They need somewhere to live and often end up in an apartment, which doesn’t have enough space for all their stuff, so they use storage facilities.

This business can be a great cash flow generator, although competition can be fierce.  Public Storage has a great brand and huge footprint.

Digital Realty Trust (NYSE:DLR)

Digital Realty Trust (NYSE:DLR) is yet another real estate play, but a different kind, and that’s why I like its Series E 7% preferred shares.  In this case, the REIT focuses on properties that have operations central to the daily operations of technology industry tenants, corporate enterprise datacenter users, and financial services companies. So they hold the properties where the back-room tech stuff happens.  This includes internet gateway properties, corporate datacenter properties, and technology manufacturing properties, and regional or national offices of technology companies.  It’s only got 75 properties, of which 20% are over in Europe.

J.P. Morgan Chase (NYSE:JPM) 

Finally, we have a company everyone understands: J.P. Morgan Chase (NYSE:JPM) and its 6.85% Series CC Preferred stock.   In this case, we have a global financial services company, handing every kind of financial transaction you can imagine.  Investment bank, regular bank, credit card issuer, wealth management, you name it and JPM does it.

The key with JPM, as it is with all banks, is solvency.  We learned that the bank survived the financial crisis, so we can be pretty certain it will survive a lot of other things.  That means its preferred shares are likely to be pretty safe.

Lawrence Meyers owns shares of Ashford Hospitality Trust and its Series D preferred.

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