If you are an income-focused investor who likes to broadly diversify your holdings across various parts of the capital structure, there are two newly issued preferred stocks of which you should be aware. Currently yielding 6.70% and 6.93%, these securities provide “real” yields and income predictability from two institutions that I have a hard time imagining would ever be allowed to fail. In fact, the companies I am referring to, JPMorgan Chase and Citigroup, are actually considered “too-big-to-fail” by many investors.
A few weeks ago, JPMorgan Chaseissued perpetual, non-cumulative preferred stock at the dividend rate of 6.70% of the $25 liquidation preference per depositary share. In other words, the new Series T preferred pays an annual dividend of $1.675. The dividend is paid in four quarterly installments in March, June, September, and December. With the stock currently trading at $25, it is yielding 6.70%. Depending on your broker, the ticker symbol is something similar to JPM-PB, JPM/PB, or JPM prB.
Additionally, the stock is redeemable at $25 per share on any dividend payment date on or after March 1, 2019. Prior to March 1, 2019, the preferred stockcan be redeemed due to “certain events involving capital treatment” as described in the prospectus supplement. Moreover, regarding qualified dividends, the prospectus supplement states, “Non-corporate U.S. Holders will generally be eligible for reduced rates of taxation on any dividends received from us with respect to the depositary shares, provided that certain holding period and other requirements are satisfied.”
Citigroup’s new preferred stock was issued so recently that it is still trading with the temporary symbol CTGBL. At some point in the coming days, it should receive a permanent ticker. This preferred pays an annual dividend of $1.71875, equivalent to a dividend rate of 6.875% of the $25 liquidation preference. The dividend is paid quarterly, in February, May, August, and November. At the recent price of $24.80, Citigroup’s Series L preferred is yielding 6.93%.
Furthermore, Citigroup’s new preferred stock is redeemable at $25 per share on any dividend payment date on or after February 12, 2019. Prior to February 12, 2019, the preferred stock can be redeemed should a “Regulatory Capital Event” occur as described in the prospectus supplement. Also, regarding qualified dividends, the prospectus supplement states, “Distributions constituting dividend income received by certain non-corporate U.S. holders in respect of the Preferred Stock will generally be subject to taxation at the preferential rates applicable to long-term capital gains, provided applicable holding period requirements are met and certain other conditions are satisfied.”
Two things regarding these preferred stocksthat may concern investors are the fact that there is no maturity date and the non-cumulative nature of the dividends.
Regarding no maturity date, if you want to create a broadly-diversified allocation to preferred stocks, this is something you must come to grips with. Concerning the principal invested in preferred stocks, there isn’t the same level of security as with individual bonds that mature at par. But to compensate for that risk, preferred stocks generally offer more attractive yields. The way I deal with the dilemma of no maturity dates is to simply keep my allocation lower than it otherwise would be if the preferreds had maturity dates.
Should the non-cumulative nature of the dividends make you nervous, let me note that throughout the financial crisis, JPMorgan Chase continued to pay dividends on its common stock. If a bank could survive the financial crisis without halting the dividend on the common stock, I feel reasonably confident in the sustainability of today’s preferred stock dividends. Citigroup, however, is a different story. During the financial crisis, it halted the dividend on its common stock and on some preferred stocks. It is for this reason that my investments in Citigroup reside higher up the capital structure. Nevertheless, I recognize there are investors who believe the financial crisis was a once-in-a-lifetime event and that preferred stock investors who share that point of view may find Citigroup’s new security of interest.
If your income-focused portfolio is lacking high enough “real” yields, it is time to carefully consider JPMorgan’s and Citigroup’s new high-yielding preferreds.
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