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HomeMarket6 Preferred Stocks That Offer Safety and High Yields

6 Preferred Stocks That Offer Safety and High Yields

Banks like Wells Fargo are the largest issuers of preferred shares.

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Victor J. Blue/Bloomberg

There still is plenty of yield in the depressed preferred-stock market—even after the recent half-point yield decline in the Treasury 10-year note to 3.7%.

Many preferred issues yield 6% or more and offer investors good dividend security since they are a senior form of equity. Preferred holders also benefit since dividends, like those on common stock, usually are taxed favorably. Most preferreds with a $25 face value—the so-called retail market—trade on the New York Stock Exchange. This makes them more liquid and transparent than either corporate or municipal bonds, which change hands in the more-opaque over-the-counter market.

“The risk/reward is great,” says Allen Hassan, a managing director and head of preferred stock trading at Ziegler Securities. Selling pressure in the sector has abated, he adds.

The $350 billion market has been hit hard by the sharp rise in interest rates this year, since most preferreds are perpetual, making them like super-long-term bonds. Many issues are down 30% in price, and the leading exchange-traded fund,
iShares Preferred & Income Securities
(ticker: PFF), has dropped almost 20% this year, to $32 a share, and yields 6.1%.

Banks are the largest issuers, and representative securities like the
JPMorgan Chase
4.625% series L (JPM Pr L) and
Wells Fargo’s
4.75% series Z (WFC Pr Z) yield about 6%.
AT&T’s
4.75% series C issue (T Pr C) fetches about $18 for a 6.5% yield. The more speculative
Ford Motor
6.5% (F Pr D) trades around $23 and yields 7%. All of these trade below their face value of $25.

Hassan points to
Prospect Capital’s
series A 5.35% issue (PSEC Pr A), trading around $16 and yielding 8.5%. (Prospect Capital is a business development company.) Another option is
Lincoln National’s
recent 9% issue (LNC Pr D) that trades around $26.50, a premium to its face value of $25. It has a yield of 7.5%, assuming the company redeems the issue in five years.

Call features normally limit upside on preferreds, but the return profile is more symmetric now with so many preferreds at big discounts to face value. Hassan says this feature is attracting investors to deeply discounted parts of the sector.

Write to Andrew Bary at andrew.bary@barrons.com

Credit: marketwatch.com

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