Finding high dividend yields has become difficult. Income investors are often forced into accepting low returns or taking on excessive risk in sketchy stocks and junk grade bonds. It seems every high-yielding investment has a corresponding unacceptable risk level in today's low rate environment.
Fortunately, there is a solution for income investors.
If you have not already guessed it, I am referencing preferred stock.
Many investors are not aware of the benefits of preferred stock or even what it is. This article will explain preferred stock and reveal five stocks are creating 6% and more excellent dividend yields.
The two classes of stock are common and preferred. Both categories carry an ownership interest in the company, but that is where the similarities end.
The primary difference is that common stockholders usually have voting rights for the company's decisions while preferred stockholders may or may not have the right to vote. An excellent way to think about the preferred stock is that it is similar to a bond. Preferred stockholders have a stronger right to the company's assets, earnings, and dividends than common stockholders. In fact, dividends are usually guaranteed to preferred stockholders while common shareholder dividends are at the whim of the company's board of directors. Not to mention that the dividends of preferred stocks are often more significant than common stock.
Sounds perfect, right? Well, there is a downside to the preferred stock.
Just like a bond, preferred stock has an inherent par value. The par value is inversely tied to interest rates, meaning that as interest rates climb, the preferred share price may decline. Investors also need to be aware of the callability aspect of preferred stocks. Callability implies that the company can redeem the shares. Share redemption is often at a premium price, but it is still a significant factor when evaluating preferred stock.
Right now, the average yield of investment grade preferred stocks are 5.8%, and the total global preferred market is close to $1 trillion.
If you are seeking high yields and the callability factor or lack of a bond like maturity date does not matter to you, preferred stock can make a fantastic investment!
Here are five preferred stocks you need to know:
1. Seaspan (SSW Pfd E)
A coupon of 8.25%, a current yield of 8.49% and an impressive 9.20% yield to call date, Seaspan is an attractive investment.
The company is an independent charter owner and manager of containerships. Earnings can be steady thanks to long-term, fixed-rate time contracts with a variety of container liner companies.
While the common stock is trading in the $8.00 per share zone, preferred shares with a February 2019 call date are market priced in the $24.00 per share region.
In bullish news, Deutsche Bank recently upgraded the shares to Buy from Hold thanks to deleveraging and dividend growth.
2. Morgan Stanley (MS Pfd H)
A financial holding company whose preferred shares are currently yielding 6.31% with a coupon of just over 7%. Boasting a call date of October 2023, the yield to call rests at 4.53%.
Interestingly, the preferred shares are trading in the $28.00 range while the common shares are over $53 per share.
Morgan's market has soared to over $100 billion after languishing in the $7 billion range just around a decade ago. Also, 2017 profits were nearly 300% greater than those of 2014.
3. KKR (KKR Pfd A)
Arguably the world's leading private equity shop, KKR manages over $130 billion and invests in a wide variety of companies and funds globally. The firm's preferred shares boast a coupon of 6.75% and a current yield of 6.57%. The yield to call date of June 2021 posts at 5.83.
Recently, KKR announced it would be converting from a partnership structure to a corporation to benefit from the changing tax laws and to make it easier to invest in the company.
4. Apollo Group Management (APO Pfd A)
An alternative asset manager with a market cap of over $6 billion. Its preferred shares coupon is just under 6.4% with a current yield of 6.57% and a yield to call of 7.50% on a March 2022 date.
Moves on Xerox and other companies are keeping interest high in Apollo.
5. Cohen & Steers Preferred Securities and Income Fund (CPXAX)
If you want diversification within the preferred space, CPXAX is an ideal choice. The fund is currently yielding just under 5% but be aware of the high front-end load charge.
Risks To Consider: Preferred stocks have less upside potential than common shares. Also, interest rate risk is genuine due to the par value. Be certain to evaluate the company fully and not invest purely based on yield.
Action To Take: Consider adding preferred stocks to your income portfolio to increase yields and diversify.