Bond Investors Should Think Preferred Stocks For Generous Yields

Exchange Traded Funds

key-to-investing-ssLooking for decent yields?  You’re not going to find them in the bond market, with 10-year Treasuries well under 3% and 10-year triple-A rated corporates a little over 3%.  But you can find them – if you know where to look.

I’m finding them in preferred stocks, those stock-bond hybrids that offer a relatively high degree of safety.  They’re issued like stocks but pay much more generous dividends than common shares, resulting in much better yields than the highest-quality bonds.  Yet, like bonds, they’re often callable and generally trade in a relatively narrow price range.

And, if you’re immediately turned off by the word “stock,” take note:  their dividends get paid out before those on common stock.  So, if a company is forced to cut its dividends, it’s got to cut the common first.  That’s a level of safety just below corporate bonds.

Among my favorite preferreds  right now are Ashford Hospitality Trust (AHT) Preferred Series D and Series E shares (specific preferred tickers vary by broker). The Series D trades at less than 2% above its issuing price (“par value”) and pays $2.11 annually, or about 8.3%. During the worst of the economic crisis, when many wondered if hotel REITs would go out of business or default on their debt, Ashford carefully managed its liquidity and debt maturities. It did it so well that the Preferred D dividend never got cut. Since then, Ashford  added the Series E, which trades at a premium over par of 7 to 8 percent to yield an attractive 8.4%.

HSBC Holdings (HBC) Preferred Series H is another fairly solid play. Although I’m not always keen on buying financials, HSBC is in good enough shape for me to point this out. It yields 6.7% and trades   slightly under par. Some might say the fact the stock is rated “A” by the rating agencies should give one pause. Frankly, because of their conflicts of interest, I don’t pay attention to rating agencies and don’t trust them. My own assessment of the company and its balance sheet is what gives me confidence.

Case in point: U.S. Bancorp (USB) is one of the very few banks that weren’t submarined by gobs of toxic assets on their balance sheets. U.S. Bancorp engaged in very conservative real estate underwriting and never has been in danger of the kind of insolvency feared of its larger, more famous brethren. The company’s Preferred H shares pay $0.3219 per share for a 5.91% annual yield.

I’d also jump on Goldman Sachs (GS) Series B shares. First, it’s Goldman Sachs. The company’s balance sheet, income statement and stock price were hammered in the aftermath of the financial crisis  of five years ago, but have recovered to a level higher than the firm’s historical averages.  Still one of the best-managed banks in the world, it’s not going  bankrupt — ever — nor is its preferred stock in danger of losing its dividend payouts. This preferred  oays an annual dividend of $1.55 per share, for a solid yield of 6.2%.

As always, you need to do your own research. For my money, however, these seem like pretty solid choices.

About Lawrence Meyers

lawrence meyers

Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]

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