6 Preferred Stocks To Buy Right Now, And 1 To Avoid

Since COVID-19’s initial selloff around March, the overall market indices have been rallying continuously, with relatively limited volatility and strong investor confidence. During this time, the technology sector has become the new safe-haven and go-to place when one is pondering on where to allocate capital in the market.

However, combining the sector’s already tiny yields, coupled with lifting the rest of the market higher, the S&P500’s dividend yield has been near all-time lows, following the general trend of declining trends. The index currently yields around 1.6%, which reflects the current scarcity of higher-yielding securities. Simultaneously, U.S. T-bills offer yields that hardly cover for inflation, leaving no margin for investors to make a return on their investment in real terms.

As a result, income-oriented investors currently have a hard time to find income-producing securities, with most of the higher-yielding ones having significant risks attached. Thankfully, another category of equities has historically been an excellent source of stable income streams, most often featuring a more balanced risk/reward investment case. These are none other than preferred stocks.

What Is Preferred Stock?

A preferred stock is a special type of stock that pays a set schedule of dividends, which are predetermined. Unless otherwise specified, it has no claim to the company’s overall net income, as is the case with common stocks.

Preferred stocks often resemble a bond, as the dividends the company pays out are almost like the coupon payments it would pay as interest on a bond. A company is not allowed to issue dividend payments on its common stock unless it has already settled its preferred stock dividends. Most of the time, preferred stocks are cumulative. This means that if a company struggles for a while and has suspended its common stock dividends while also failing to meet its preferred stock obligations, upon recovery, it first has to settle all accrued dividends on its preferreds before resuming its common stock dividends.

Consequently, preferred stocks offer higher dividend priority than common stock, adding extra layers of assurance that investors will keep receiving their dividends. Additionally, since their returns are almost entirely predetermined, they trade more like bonds, and their price is generally uncorrelated with that of the common stock. Hence, the feature considerably lower volatility levels in times of uncertainty.

In exchange for shielding themselves into the safety of preferreds, however, preferred stockholders have no claim to any potential additional rewards, no matter how well the company is doing. Overall, preferreds offer a more balanced risk/reward type of investment, which, more often than not, is able to meet investors’ income-producing needs adequately.

It’s important to note, however, that preferred stock dividends are not guaranteed. A company’s bonds will always rank higher in the event of a hypothetical bankruptcy. Therefore investors still face some levels of risk, which greatly varies from company to company. Some preferreds are perpetual, while others are not. Some have fixed rates, while others have variable rates, and some are even convertible. Hence, each case is unique. We will be explaining those in detail whenever relevant.

Preferred Stock Glossary

For your own convince on the rest of this report, we have listed the following preferred-stock-related terms and their corresponding meaning:

  • Par Value: The par value of preferred stock is the amount upon which the associated dividend is calculated. For instance, if the par value of the stock is $100 and the coupon/dividend is 5%, then the issuing entity must pay $5 per year for as long as the preferred stock is outstanding (usually on a quarterly or monthly basis).
  • Call date: The call date is a day on which the issuer has the right to redeem a callable preferred at par, or at a small premium to par, prior to the stated maturity date.
  • Redemption date: The redemption date is the date the issuer is obligated to redeem the preferred at par, and all of its accrued unpaid dividends. Most preferred stocks are irredeemable, remaining active for long as the issuer sees fit. In other words, they are perpetual.
  • Yield to call: The Yield to call (YTC) refers to the return a preferred stockholder receives if the preferred stock is held until the call date, which occurs sometime before it reaches maturity.
  • Yield to redemption: The same as YTC, but for the redemption, if stated.

6 AAA Preferred Stocks To Buy Now and 1 to avoid

Below, we have listed 6 of the best-preferred stock we believe are currently available. By “best,” we define our views on how attractive each preferred stock’s risk/reward ratio is, albeit a subjective assessment, but based on objective data.  Additionally, we have included a preferred stock that is better to be avoided. The list’s order is random and does not assume a particular sorting factor.

#1: GasLog Ltd. Series-A (GLOG.PA)(GLOG)

Company overview

GasLog Ltd. is the owner, operator, and manager of liquefied natural gas (LNG) carriers providing support to international energy companies. The company provides maritime services for the transportation of LNG on a worldwide basis and vessel management services. As of its latest filings it operated a fleet of 28 LNG carriers. GasLog Ltd. was incorporated in 2003 and is based in Piraeus, Greece.

Key Metrics

Preferred stock analysis

A massive dividend with ample coverage…

GasLog Ltd has issued only one series of preferred shares; it’s series A. There are 4 million shares in issue, which at a potential redemption at $25/each have a $100 million redemption value. The call date was earlier in July, though the company did not redeem its shares amid lack of such an amount of funds. For the preferred stockholders, however, this is no issue since shares are perpetual. Hence distributions will continue indefinitely unless the company eventually does redeem the shares.

Investors are currently pricing shares at a discount, pushing the stock’s yield to a hefty 9.72% to price in the possibility of a perpetual irredeemable scenario. Since the company will likely never have the funds to redeem its preferreds, such a scenario is the most likely outcome. Hence the market is pricing the stock as an annuity, expecting an annualized return equal to its dividend yield.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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