From time to time, Barron’s writes about preferred stocks, which are of particular interest to income-seeking investors. They aren’t as sexy as common stocks because their price moves—up or down—are more restrained. But that relative stability attracts some folks, as does the offer of juicier dividend yields, compared with those of plain equities. Moreover, when preferred prices fall significantly—as some have now—there’s the potential for capital gains, too.
Last June 23 in these pages, Nat Beebe, a portfolio manager at Minneapolis-based preferred specialist Ulland Investment Advisors, suggested that readers sell some preferreds because they were expensive. Back then, net issuance of preferreds was down and redemptions were up. Scarcity value had boosted prices, but the yields weren’t high enough to compensate for the risk of rising interest rates. The securities he eschewed have slid some 5% to 8% since we wrote about them.
Now, he says, some preferreds could give almost equity-like double-digit percentage total returns next year. In part, his reversal reflects a technical change in that market and the softer outlook for interest-rate hikes by the Federal Reserve in 2019. The market selloff has hit other asset classes. And large outflows from exchange-traded funds that specialize in preferreds, plus selling by mutual funds, have depressed prices.
Rising interest rates tend to dampen demand for preferreds. Now, “we view the Fed as close to done,” Beebe observes. So, it’s a better time to lock in some 6%-plus yielding preferreds and possibly get capital gains, too, he says. As preferred prices have fallen, yields have begun to look more attractive. (They move inversely to prices.)
Ulland likes preferred securities with yields of 6.25% and above, and finds three that merit a look. He expects all three, which are $25 par priced, to gain $1 to $1.50 in price, which would bring the total return to about 10%. Among his picks are Keycorp 5.65% perpetual preferred, series F (KEY/PJ), trading at $22.11 recently. It offers a healthy dividend of about 6.37% and the stock could get to $23.50 when it rebounds, Beebe says.
Another is Capital One Financial ’s 5.2% preferred, Series G (COF/PG), trading at $20.93. It’s yielding 6.21% and is off 15% this year. “There could be a nice snapback if the market stabilizes,” he says. The third fave is TCF Financial , a local Minnesota bank. Its 5.7% perpetual preferred (TCF/PD) series C is priced at $21.81 and yields 6.44%. It’s a smaller bank and off the radar screen for many investors; hence, the higher yield.
The credit ratings on these three issues are at or slightly below investment-grade. Nevertheless, Beebe says these banks are healthy and have strong capital levels. Ulland owns all three, with the Keycorp preferred most recently added to client portfolios.
If common stocks make you queasy, these preferred could provide relief.
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