Hot & Spicy Preferred Stocks

Summary

  • Average dividend yields available in the market place.
  • I am an income investor and a yield chaser.
  • I have built my investment portfolio on a foundation of preferred stocks & ETD securities
  • Introducing the Hot & Spicy Preferred Stock Portfolio with 15 issues that offer yields of 7.9% to 9.6%


I consider myself to be an “income investor”.  I focus 99.9% of my efforts into investing in securities that provide at least a 6% yield.  This focus has come about from realizing that I have not been a successful investor who invests for appreciation.  I slowly began to see the value in investing in securities that offered regular income.  As this change took place, I began to recognize the different ways to invest for income and in the many classes of companies and securities that paid dividends or interest.   Here is a breakdown of the average yields that are currently available in the marketplace from various classes of investments. Much of the information is obtained from the stocks that I track.

CLASS Description Ave Yield
Champions Dividend Champions.  135 public companies that have increased dividend 25+ years in a row 2.4%
Contenders Dividend Contenders.  222 public companies that have increased dividend 11-24 years in a row 2.8%
Challengers Dividend Challengers.  517 public companies that have increased dividend 5 – 10 years in a row   3.0%
VNQ Real Estate ETF.  Broad holdings of REITS, mortgage REITS, financials, diversified financials, real estate sectors 3.9%
IG Pref Investment Grade preferred cumulative stocks. 74 issues 5.5%
ETD Exchange Traded Debt Securities (Baby Bonds). 170 issues. 6.4%
Preferred Traditional preferred cumulative stocks.  283 issues. 7.2%
cREITS Commercial REITS. 16 public commercial REITS. 7.7%
BDC Business Development Companies.  40 public companies. 9.3%
Midstream Midstream / MLP. 40 public companies that are involved with midstream energy and pipelines 9.5%
mREITS Mortgage REITS.  22 public mortgage REITS. 11.3%


Yield and Risk

In general, as the yield increases, the risk also increases.  The lowest yield class are from companies designated as Dividend Champions. These are companies that have a history of increasing their dividends for 25 and more years in a row.  That is quite a record.  They deserve to be classified as low risk.  At the other end of the table are the companies that have the highest yield, the mortgage REIT companies.  That top spot does not come easily.  Investors have voted with their dollars.  Investors have said that the only way they will invest in them is if the yield is high enough to compensate for the risk.

Each of these classes provide benefits to investors; however, as an income investor that invests on higher yielding securities, I have built my investment portfolio on a foundation of securities that yield more than 6%.  As an admitted “Yield Chaser”, I have learned the hard way that risk must be taken into account.  Yield and Risk are the 2 sides of my investment scale.    

Preferred Stocks & ETD Securities

Over the last 10 years, I gravitated to companies with high yields that provided reasonable risks for safety and the ability to pay their distributions on a sustainable basis. Higher yields generally meant lower or no dividend growth, but I was happy with generating a higher immediate return rather than waiting for the income to grow over time.  The good news for me is that there are many choices especially when I focused my search on Preferred Stocks and ETD securities.  From viewing the above table, there are several asset classes with yields higher than preferred stocks & ETD securities, but the risks are generally higher.   It is interesting that many of the stocks in the higher yield classes have issued preferred stocks where risks are lower.  There are currently 8 cREITS, 14 mREITS and 29 BDC that have issued preferred stocks or ETD securities.

I am currently tracking over 600 preferred stocks & ETD securities with a par value of $25 (I do not count convertibles).  These include 283 preferred cumulative stocks, 143 preferred non-cum stocks, 18 trust preferreds and 170 ETD Securities.  I now consider Preferred stocks and ETD securities as the foundation of my Income Portfolio.

There are several reasons why I feel comfortable owning a large number of preferred stocks & ETD securities.  First, I consider myself to be a long-term investor.  I do not trade.  I buy for the long haul.  Preferred stocks are safer than the common stock of their parent company and ETD securities are safer than the preferred stocks.  Next, preferred stocks cannot stop paying the dividend unless they are in real trouble and not before they stop paying the dividend on their common stock.  That is very important as it provides a buffer or hurdle that must be crossed before the parent company can stop paying the preferred dividend.  Then, most preferred stocks have the benefit of being “cumulative”.  This means that if they are forced to stop or delay paying the dividend, they must accumulate those missed payments and pay them back to the investor within a certain period of time. 

These are not all the benefits, but it gives you an idea of some of the beneficial features of owning a traditional preferred stock.  Yes, there are preferred non-cum stocks, but those are issued by companies that are generally considered stronger than the traditional cumulative preferreds. There are also ETD securities, which are even safer than preferreds as they are a debt and debts are higher on the list if it comes to the company being liquidated. 

Interest Rates & Preferred & ETD Securities

One of the issues that many investors point to for not investing in preferred stocks & ETD securities is that they are sensitive to interest rate fluctuations.  If interest rates rise, then market prices have a tendency to drop.  I recognize that this relationship is true, but many have missed out on this great class of investments for many years only to find that most preferreds & ETDs are currently at or above par.  If you are a long-term investor, the key is income, not the price.  Interest rates fluctuate just like the economy does.  If interest rates increase today and into the future, they will eventually change direction and fall once the economy falters.  Learn to take advantage of those changes. 

Yes, interest rates have increased, but many analysts feel that interest rates have peaked or stabilized.  We can see this trend in the 10-year treasury rate.  During 2018, it increased to over 3%, but has now dropped to around 2.5%.   These are sweet words for the preferred stock investor as stable rates means a stable market for interest sensitive securities. 

Hot & Spicy Portfolio of Higher Yielding Preferreds Stocks

Besides being an income investor, I admit that I am a “Yield Chaser”.  However, that doesn’t mean I throw caution to the wind.  I do my best to limit the risk while still reaching for higher yields.  While tracking over 600 Preferred stocks & ETD securities, I have created several portfolios of issues that help to narrow the list of acceptable securities.  One of the portfolios is the Hot & Spicy portfolio of 15 preferred issues with yields from 7.9% to 9.6%.  We all know that yields this high usually mean higher risks, but after doing research using some of the metrics shown below, I have found the rewards just may be worth the risk.  I think that many investors may also feel comfortable adding a few of these Hot & Spicy issues to their portfolio.  

Hot & Spicy Preferred Stocks

Summary Information. 

Here is more information about each preferred stock listed in the Hot & Spicy portfolio.

AHT-G.  Parent is AHT.  Ashford Hospitality Trust is a real estate investment trust (REIT) focused on investing opportunistically in the hospitality industry in upper upscale, full-service hotels. The current price is $22.96 with a yield of 8%. Even though the GAAP earning is poor, the Non-GAAP AFFO earnings shows a much better record of earnings.   The parent has a dividend payout ratio of .41 and a preferred stock dividend payout ratio of .40.  Achilles Research wrote an article on 3/26/19 with a positive takeaway. 

CAI-A.  Parent is CAI.  CAI International, Inc. operates as transportation finance and logistics company in the United States and internationally. The company operates through three segments: Container Leasing, Rail Leasing, and Logistics. It leases, re-leases, and disposes equipment; and contracts for the repair, repositioning, and storage of equipment.  The current price is $25.10 with a yield of 8.5%.  CAI reports the last 5 years as being profitable and 4 out of 5 quarters being positive.  The parent does not pay a stock dividend, but the preferred stock dividend has a very respectable payout ratio of .07.  There have been several recent positive articles from SA authors.

CHMI-A.  Parent is CHMI.  Cherry Hill Mortgage Investment Corporation, a residential real estate finance company, acquires, invests in, and manages residential mortgage assets in the United States. The company manages a portfolio of servicing related assets, residential mortgage-backed securities (RMBS), and prime residential mortgage loans, as well as other residential mortgage assets. The current price of CHMI-A is $25.25 with a yield of 8.1%.  CHMI has reported 5 consecutive years of profits and 4 out of 5 quarters of profits.  It reports a stock dividend payout ratio of .71 and a preferred stock dividend payout ratio of .14. 

CMRE-D.  Parent is CMRE.  Costamare Inc. owns and charters containerships to liner companies worldwide. As of February 27, 2019, it had a fleet of 78 containerships. The company was founded in 1974 and is based in Monaco.  The current price of the preferred is $24.98 with a yield of 8.8%.  The company has reported 5 consecutive years of GAAP profits and 4 out of 5 quarters of profits.  However, on a Non-GAAP basis, the record increases to 5 out of 5 profitable years and 5 out of 5 profitable quarters.  The stock dividend payout ratio is .93 and the preferred dividend payout ratio is .39.  In addition, the debt to equity is 1.2 with price to book of .44.  Two SA authors, Rida Morwa and J Mintzmyer, have recently written positive articles.

CODI-B.  Parent is CODI.  Compass Diversified Holdings LLC is a private equity firm specializing in acquisitions, buyouts, industry consolidation, recapitalization, and middle market investments. It seeks to invest in niche industrial or branded consumer companies, manufacturing, distribution, consumer products, business services sector, safety & security, electronic components, food, foodservice.  The current price of the preferred is $23.10 with a yield of 8.5%.  Based on CAD, the last 5 years and 5 quarters have been positive with the stock dividend payout ratio of .93 and the preferred stock dividend payout ratio of .07.  One SA author recently wrote a positive article on CODI and the preferred stock. 

CSSEP.  Parent is CSSE.  Chicken Soup for the Soul Entertainment, Inc., a media company, produces, distributes, and licenses video content in the United States and internationally. It distributes and exhibits video on-demand (VOD) content directly to consumers through digital platforms, such as smartphones, tablets, gaming consoles, and the Web through Popcornflix and A Plus networks, as well as operates a series of direct-to consumer advertising supported channels.  Current price is $25.35 with a yield of 9.6%. This is a young company that appears to have a good future in the entertainment business.  The have a limited earnings history and do not pay a common stock.  But within the last 2 weeks, their common stock jumped to all time highs after reporting excellent news.  On 4/1/19, SA wrote:  “Shares rose 36% Friday after news of the deal and the company’s earnings, which sported a revenue gain (full year) of more than 150% and EBITDA gains of 180%. Benchmark responded to the company news by boosting its price target on “one of the hottest small properties in the media landscape.” It’s set its new target at $18, up from $16 and currently implying 65% upside.” 

DCP-B.  Parent is DCP.  DCP Midstream, LP, together with its subsidiaries, owns, operates, acquires, and develops a portfolio of midstream energy assets in the United States. The company operates in two segments, Logistics and Marketing, and Gathering and Processing.  Current price is $24.42 with a yield of 8.1%.  DCP has been profitable 5 out of 5 years and 5 out of the last 5 quarters. Based on Distributable Cash Flow (DCF), its stock dividend payout ratio is .90 and the preferred dividend payout ratio is .24.  Double Dividend Stocks recently wrote a positive article and mentioned that DCP has increased guidance for EBITDA, DCF and dividend coverage.  I personally feel that many MLP and midstream companies are undervalued with a positive outlook for energy.

GLOP-A.  Parent is GLOP.  GasLog Partners LP owns, operates, and acquires liquefied natural gas (LNG) carriers under multi-year charters. As of February 26, 2019, its fleet consists of 14 LNG carriers.  Current price for the preferred is $25.19 with a yield of 8.6%.  Shipping stocks are a challenge, but many analysts feel that LNG is one of the bright spots.  GLOP reports 5 profitable years of GAAP earnings and 5 out of 5 profitable quarters.  It also reports DCF with a dividend payout ratio of .96 and preferred stock dividend payout ratio of .17.  Dividends paid by these preferred shares are eligible for the preferential income tax rate of 15% to a maximum of 20% depending on the holder’s tax bracket.  There have been several recent positive articles from Seeking Alpha authors.

LMRKO.  Parent is LMRK.  Landmark Infrastructure Partners LP acquires, develops, owns, and manages a portfolio of real property interests and infrastructure assets in the United States. The company leases its real property interests and infrastructure assets to companies operating in the wireless communication, outdoor advertising, and renewable power generation industries.  Current price is $25.13 with a yield of 7.9%.  LMRK has a good history of GAAP earnings with 4 out of 5 years of profits and 4 out of 5 quarters of profits.  The company has struggled to cover its stock dividend but its preferred stock has a dividend payout ratio of .25.  There is much written about LMRK as many analysts feel that the company is improving and should be in great shape over the coming quarters.   Brad Thomas (SA Author) has written the latest positive article. 

NGL-B.  Parent is NGL.  NGL Energy Partners LP, together with its subsidiaries, engages in the crude oil logistics, water solutions, liquids, retail propane, and refined products and renewables businesses.  Current price is $23.94 with a yield of 9.4%.  Like many midstream companies, the last few years have been a challenge, but their fortunes appear to be turning for the positive.  Their distributable cash flow gives them a dividend payout ratio of .84 and a preferred dividend ratio of .27.   There have been 3 recent positive articles written about NGL.  

NS-C.  Parent is NS.  NuStar Energy L.P. engages in the terminalling, storage, and marketing of petroleum products. The company also engages in the transportation of petroleum products and anhydrous ammonia. It operates through three segments: Pipeline, Storage, and Fuels Marketing.  Current preferred stock price is $24.77 with a yield of 9.1%.  Another midstream company that has faced challenges over the last few years, but with rising oil prices and renewed energy sector, the future looks much improved.   The stock distributable payout ratio is .68 and the preferred dividend payout ratio is .15.  Besides the preferred shares, they also have an ETD with yield at approx. 9%.

NYMTN.  Parent is NYMT.  New York Mortgage Trust, Inc. acquires, invests in, finances, and manages mortgage-related and residential housing-related assets in the United States. The current price of this preferred is $24.06 with a yield of 8.3.  Their GAAP earnings has been good with 5 out of the last 5 years being profitable and 4 out of 5 quarters being profitable.  Even thought the earnings are not sufficient to pay the stock dividend, the preferred dividend has a payout ratio of .23.  Rida Morwa has written a recent article with positive comments about the industry and NYMTN.  

PMT-B.  Parent is PMT.  PennyMac Mortgage Investment Trust, a specialty finance company, invests primarily in residential mortgage loans and mortgage-related assets in the United States.  The current price is $25.23 with a yield of 7.9%.  The company has perfect record of earnings with 5 profitable years and 5 profitable quarters in a row.  The stock dividend payout ratio is .94 and the preferred stock payout ratio is .17.  Debt to equity is .6 and Price to book is 1.  With interest rates falling, mortgage REITS appear to be very good shape.

SOHOB.  Parent is SOHO.  Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT focused on the acquisition, renovation, up branding and repositioning of upscale to upper-upscale full-service hotels in the Southern United States.  Current price is $25.15 with yield of 8.0%.  REITS cannot use GAAP earnings as a measurement for earnings because of high depreciation amounts.  Therefore, AFFO is used to determine earnings available for dividends.  Using AFFO, their stock payout ratio is .48 and their preferred stock dividend payout ratio is .24.  Parent has recently increased the common stock dividend and is classified as a dividend diamond with 8 consecutive years of increasing their dividend. 

SSW-I.  Parent is SSW.  Seaspan Corporation operates as an independent charter owner and manager of containerships in Hong Kong. The company charters its containerships under long-term and fixed-rate time charters to various container liner companies. As of March 1, 2019, it operated a fleet of 112 containerships. Current price is $24.85 with a yield of 8%.  Seaspan is the world’s largest containership company.  They recently announced that it had partially prepaid two credit facilities and expanded its pool of unencumbered vessels to 37 from 32.  Their CFO stated that “We continue to execute on our near-term capital strategy to strengthen our balance sheet by deleveraging, increasing our unencumbered fleet, and consolidating our secured credit facilities”.  SSW has a stock dividend payout ratio of .17 and a preferred stock dividend payout ratio of .13. 

In Summary

During the last 3 months of 2018, the market dropped into bear territory.  With the scare of rising interest rates, preferreds stocks and other interest sensitive securities fell along with the market.  However, 2019 has been a very positive story with many preferreds returning to their previous highs after the fed made it clear that interest rates would stabilize.  But even with new highs, there are still many relatively safe and reliable preferred stocks that are available with high yields.  The Hot and Spicy portfolio lists 15 preferreds stocks that offer high yields from companies that offer a good risk/reward ratio, with most handily able to cover both their common stock and their preferred stock dividends.    All 15 are well off their 52 week lows and fast approaching 52 week highs.  With the economy doing well and interest rates low and dropping, preferred stocks offer some great values and appealing yields.   Take a close look at the list.  You may find one or more gems that can be added to your portfolios.   

Thanks for reading,

Rich Hill
I Prefer Income


I Prefer Income Blog 3-12-19

I started investing when I was around 18.  The father of one of my good friends was a broker at Dean Witter Reynolds.  One day I went with my friend to visit his dad at his office in downtown, Portland, Oregon.  I was a little star struck as so much was going on around me.  People sat or stood around watching the prices roll across the big electronic ticker tape screen on the wall and making notes and talking to each other.  It was exciting, but the best part came once I talked do my friend’s dad.  He talked a bit about the market and some of the companies he was excited about. He didn’t realize it, but his enthusiasm convinced me to dip my toe in the water.  I ended up buying GAF (General Aniline and Film) before I left his office.  Do you remember the little View Master that displayed pictures of Disney and other characters into view one after another?  That little gadget is long gone, but during this period, it was a big deal.  I eventually doubled my small investment after a relatively short period of time.  This was my initiation into the wonderful world of investing.

Like many new investors, I have made a lot of mistakes.  After years of trying to hit home runs from buying stocks at low prices and riding them to the mountaintop, I was lucky to hit a single or double.  I say I was lucky because all too often, I struck out or hit foul balls.  This became very expensive; not only because I was rarely successful on a consistent basis, but the cost of every transaction was high.  Most trades came about by phoning my broker.  That took time and cost a percentage of the total amount invested.    

Investing has never been quite as rewarding as that first investment, but through “trial and error investing”, I have found a way to invest that I am comfortable with and enjoy.  Knock on wood, as it now provides a nice income that is relatively safe, reliable and continues to grow.   I consider myself an “income investor”.  I focus 99.9% of my efforts into investing in securities that provide a minimum of 6% yield.  This focus has come about from realizing that I was not successful enough to make money consistently from stocks that appreciate in value.  I slowly began to see the value in investing in companies that paid a dividend.  As this change took place, I started to recognize the different ways to invest for income and in the many classes of companies and securities that paid dividends or interest.   I feel that there are 2 basic ways to invest for income. 

Higher Yielding Securities.

These securities generally do not generate dividend growth, nor do they provide an opportunity for long term appreciation. 

The benefit of investing in securities with higher yields is that you receive more income – immediately.  You don’t have to wait for companies to increase their dividends over several years.  The good news is that there are a lot of options available.  The bad news is that the risk level is generally higher than lower yielding investments.  There is additional good news as there are many exceptions where investors can obtain higher yields with lower risk.

Lower Yielding Securities

These securities generally have the ability and willingness to pay and increase dividends.  And because of this growth, they also provide an opportunity for long term appreciation.

The benefit of investing in securities with lower yields that grow dividends is that over time, these companies will generate increasing income and increasing appreciation.  The bad news is that it could take a long time before the results are high enough to meet your needs.  More bad news is that not all low yield, dividend growth companies are successful.   

Yield and Risk

In general, as the yield increases, the risk also increases.  The lowest yield class are those companies that have a history of increasing their dividends for 25 and more years in a row.  That is quite a record.  They deserve to be classified as low risk.  At the other end of the table are the companies that have the highest yield, the mortgage REIT companies.  That top spot does not come easily.  Investors have voted with their dollar.  Investors have said that the only way they will invest in them is if the yield is high enough to compensate for the risk.

Each of these classes provide benefits to investors; however, as an income investor that invests on higher yielding securities, I have built my investment portfolio on a foundation of securities that yield more than 6%.  As an admitted “Yield Chaser”, I have learned the hard way that risk must be taken into account.  Yield and Risk are the 2 sides of my investment scale.    

Preferred Stocks & ETD Securities

I found that over the last 10 years, I gravitated to companies with high yields that provided reasonable risks for safety and the ability to pay their dividend or interest on a sustainable basis. The good news for me is that there are a lot of choices especially when I focused my search on Preferred Stocks and ETD securities.  Yes, I do own securities in all the classes with yields above those of preferred stocks & ETD securities, but they are harder to find, and I tend to own them for a shorter period of time.   It is interesting that many of the stocks in the higher yield classes have issued preferred stocks where risks are lower.  As an example, there are 8 cREITS, 14 mREITS and 29 BDC that have issued preferred stocks or ETD securities.

I have discovered that there are over 600 preferred stocks & ETD securities with a par value of $25 (I do not count convertibles).  These include 168 ETD securities, 278 traditional preferred stocks, 135 traditional preferred non-cum stocks and 18 trust preferreds. 

I now consider preferred stocks & ETD securities as my investment foundation.  The majority of my portfolio is built on this foundation and from there I work my way higher with selective higher yielding securities.  There are several reasons why I feel comfortable owning preferred stocks & ETD securities.  First, I consider myself to be a long-term investor.  I do not trade.  I buy for the long haul.  Preferred stocks are safer than the common stock of their parent company and ETD securities are safer than the preferred stocks.  Next, preferred stocks cannot stop paying the dividend unless they are in real trouble and not before they stop paying the dividend on their common stock.  That is very important as it provides a buffer or hurdle that must be crossed before the parent company can stop paying the dividend.  Then, most preferred stocks have the benefit of being “cumulative”.  This means that if they are forced to stop or delay paying the dividend, they must accumulate those missed payments and pay them back to the investor within a certain period of time. 

That is not all the benefits, but it gives you an idea of some of the beneficial features of owning a traditional preferred stock.  Yes, there are preferred non-cum stocks, but those are issued by companies that are generally considered stronger than the traditional preferreds. There are also ETD securities, which are even safer than preferreds as they are a debt and debts are higher on the list if it comes to the company being liquidated. 

Interest Rates & Preferred & ETD Securities

One of the issues that many investors point to for not investing in preferred stocks & ETD securities is that they are sensitive to interest rate fluctuations.  If interest rates rise, then market prices have a tendency to drop.  I recognize that this relationship is true, but many have missed out on this great class of investments for many years only to find that most preferreds & ETDs are currently at or above par.  If you are a long-term investor, the key is income, not the price.  Interest rates fluctuate just like the economy does.  If interest rates increase today and into the future, they will eventually change direction and fall once the economy falters.  Learn to take advantage of those changes. 

Yes, interest rates have increased, but many analysts feel that interest rates have peaked or stabilized.  We can see this trend in the 10-year treasury rate.  During 2018, it increased to over 3%, but has now dropped to around 2.65%.   These are sweet words for the preferred stock investor as stable rates means a stable market for interest sensitive securities. 

Here is one other thing to consider.  Have you ever thought of buying an annuity? If you are 70 and purchase a Single Premium, Immediate Annuity, you can probably receive about 6 to 6.5% yield for the rest of your life.  That doesn’t sound too bad until you realize that when you are gone, the principal is also gone.  However, if you were to invest the same amount in a preferred stock or ETD security, you could probably earn a higher yield.  The difference is that 100% of the principal would be maintained and available to your heirs.    

This article will be continued with articles such as the financial metrics I use to determine safety, reliability and dividend sustainability.  I will also present the various portfolios I maintain, such as the “Hot & Spicy” portfolio, the “Meat & Potatoes” portfolio, the and the “Investment Grade” portfolio.  Each of these contain specific securities that match the portfolio name.      

Thanks for reading,

Rich Hill
I Prefer Income