While ongoing high demand for U.S. income securities has led issuers to introduce a huge crop of new preferred stock issues this year, they appear to have taken a break during July with only five new securities coming to market.
July’s five new preferred stocks are offering an average current yield of 6.2 percent for the consideration of preferred stock investors. There are now 905 of these securities trading on U.S. stock exchanges.
Note that I am using IPO date here, rather than the date on which retail trading started. The IPO date is the date that the security’s underwriters purchased the new shares from the issuing company. Anxious to sell the new shares, underwriters will generally sell to broker/dealers using a temporary trading symbol on the wholesale Over-The-Counter exchange (who, in turn, sell them to us at retail within a few days of the IPO date).
Buying New Shares for Wholesale
Note that the most recently introduced issue – CITLP from Capital One (NYSE:COF) – is still trading on the Over-The-Counter exchange (as of July 29). This is a temporary OTC trading symbol until this security moves to the NYSE, at which time it will receive its permanent symbol. But there is no need to wait; during a period of high prices, individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see “Preferred Stock Buyers Change Tactics For Double-Digit Returns” for an explanation of how the OTC can be used to purchase shares for discounted prices during a period of high preferred stock prices).
Your broker will automatically update the trading symbols of any shares you purchase on the OTC. CITLP will become COF-G.
All five of July’s new issues are traditional preferred stocks. Two of the five are from financial institutions – SF-A from Stifel Financial (NYSE:SF) and CITLP from Capital One (soon to become COF-G).
CITLP was the largest July issuance, with its 24 million shares raising about $600 million for Capital One. Stifel’s SF-A, issued at six million shares, seems puny by comparison. The dividends of both of these bank-issued securities are non-cumulative, allowing the value of these securities to be counted toward these bank’s Tier 1 regulatory reserves.
July’s offerings also included three new issues from property REITS – AHT-F from Ashford Hospitality (NYSE:AHT); BRG-C from apartment developer Bluerock Residential Growth (NYSEMKT:BRG); and PSA-D from Public Storage (NYSE:PSA) for those in need of a place to put that old couch and lawn furniture. Ashford’s AHT-F continues a trend that we have seen this year with new preferred offerings from hotel REITs.
Dividends paid by REIT preferred stocks are a pre-tax distribution of the company’s earnings to shareholders. As a pre-tax distribution, it is the shareholder who pays the full tax so dividends received from REITS do not qualified for any type of favorable tax treatment (although portions of REIT dividends are frequently re-classified at tax-time as capital gains, hence lowering your tax burden in that manner).
On the other hand, dividends received from the two new bank preferred stocks in the above table that have “QDI” in the Status column are a distribution of the bank’s after-tax earnings and are therefore designated as being Qualified Dividend Income, although there are exceptions and conditions (see prospectus).
About the New Issues
Ashford Hospitality’s 7.375 percent AHT-F is a 4.8 million share offering, generating about $116 million for the company. $75 million of these proceeds were used to redeem all 3 million outstanding shares of the company’s AHT-E 9.0 percent preferred stock. Because of the difference in the size of these two issues, however, the company’s annual dividend obligation to shareholders has increased by $2.1 million, albeit at a lower dividend rate.
The 4.95 percent offered by Public Storage’s new PSA-D preferred stock is the lowest coupon preferred stock ever issued by the company, demonstrating the strength of PSA’s A3/BBB+ ratings. Public Storage, by the far the most prolific preferred stock issuing REIT, now has twelve preferreds trading. The company’s highest coupon offering is PSA-Z at 6.0 percent, but PSA-Z also trades at about $29 per share, well above this security’s $25 par value.
BRG-C is Bluerock Residential’s second new offering within the last ten months, its only other preferred, BRG-A, being introduced last October at 8.25 percent. As these two issues are nearly identical in their terms, the downward pressure on interest rates that we have seen over this ten month period is on display here.
In Context: The U.S. Preferred Stock Marketplace
So how do the new July issues stack up within the context of today’s preferred stock marketplace?
During the week ending July 17, 2016, Japanese buyers bought a record-setting $25.4 billion of U.S. debt, pushing prices of U.S.-issued income securities to new highs during the month. Global interest rates at zero or negative were cited as the primary driving force, as foreign investors search for yield (see “Here’s why 10-year Treasury may still drop below 1%“). Until alternatives present themselves, income investors are likely to continue to see higher than normal prices for U.S. income securities, including preferred stocks.
Coupled with the limited success of the Fed’s efforts to increase the cost of money, the average market price of U.S.-traded preferred stocks has increased by $1.68 per share this year (an annualized value gain of 11.7 percent), including a $0.42 increase during July.
The data being charted here is limited to call-protected issues in order to limit the price distorting effect of an anticipated redemption.
Beyond ratings, many things affect the market prices of these securities such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer (think upstream oil producers), perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a “bang-for-your-buck” measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.
While the continuing strong demand for U.S. preferred stocks can be attributed to several factors, the next chart makes it pretty clear that the lack of attractive alternatives is certainly among them.
U.S.-traded preferred stocks are currently returning an average current yield of 6.5 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.5 percent and that of the 2-year bank CD is a meager 1.4 percent (currently, tying up your money for an extra eight years in a 10-year treasury only gets you 0.1 percent over a federally-insured bank CD).
For comparison, I have set the Yield column in the first table above to show the current yield of the five new July preferreds on July 29. It is into this marketplace that July’s five new issues were introduced.
Income versus Value Investing, Year-To-Date
With an average current yield of 6.5 percent, plus the 11.7 percent annualized YTD value gain, those investing in U.S.-traded preferred stocks since the beginning of 2016 are currently on pace for a total annualized return of 18.2 percent (6.5 percent of which is realized in dividend cash).
Those investing in common stocks, as measured by the S&P500, had a great July. Starting at 2013, this common stock value index closed on July 29 at 2174, an unrealized annualized value gain of about 13.7 percent plus about two percent in average annualized dividend yield – a year-to-date annualized gain of about 15.7 for common stock investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The CDx3 Notification Service is my preferred stock email alert and research newsletter service and includes the database of all preferred stocks and Exchange-Traded Debt securities used for this article.