By Philippe van Doorn
As Interest Rates Rise, So Do Dividend Yields on Preferred Shares
This year, almost every type of stock has fallen – bad news if you watch your portfolio value every day and find it hard to sleep at night. On the other hand, it is good news if you are looking for an income.
Why is this good news?
Because higher interest rates mean lower bond and preferred stock prices. For these income-oriented securities, lower prices mean higher returns for investors buying now and possibly – or even likely – higher capital gains down the road.
This has been a brutal year for funds that invest in bonds and preferred stocks. But any income investor should expect the market values of securities to move in the opposite direction of interest rates. These instruments are only suitable for long-term investors seeking income. They are not designed for quick wins.
Invesco Financial Preferred ETF (PGF) stock price is down 20% in 2022. It pays a monthly dividend that has hovered between 7.1 and 7.2 cents per share over the past year. If we start with the 7.1 cents and the closing price of $15.04 on September 28, the current yield for a new investor is 5.66%. At the end of 2021, based on the closing price of $18.82, the current yield was 4.53%.
Thus, PGF has become a more attractive investment. But you might consider owning your own preferred shares – you can hold them for as long as you like and sell them with a gain or a loss, with the former much more likely after the prices of older securities have fallen well below. at face value – provided you have the discipline to hold out for years.
Below is a set of terms and resources, along with two lists of preferred stocks, to provide examples of how income-seeking investors can take advantage of current discounts.
Preferred shares of JPMorgan Chase
For example, JPMorgan Chases (JPM) Series JJ Preferred Shares were issued at a par value of $25 in January 2021, at a dividend rate of 4.55%. At the end of 2021, the stock’s closing price was $26.23, which meant that if an investor bought the stock at that price, the current yield would only be 4.34%, and if the If the preferred stock were redeemed, the investor would end up with a loss of $1.23 per share.
Fast forward to September 28 and the JPM JJ series was down to $19.02 per share. If you entered at this price, your current yield would be 5.98%, and if the shares were eventually redeemed, your gain would be $5.98 per share.
In a Sept. 7 note to clients, Odeon Capital analyst Richard Bove explained that he had a “conservation” rating on JPM common stock, but recommended buying the preferred stock. of the society.
Preferred Share Terms
Before showing you where to find the information, here are some definitions of terms you’ll need for your own preferred stock research.
Any investor can buy preferred shares. All you need is a brokerage account.
A preferred stock is different from a common stock in that its owner has no voting rights. Preferred shareholders also have preference over common shareholders in the event of a company’s liquidation. Simply put, if a company goes bankrupt and is liquidated, bondholders get paid first, then preferred stockholders, and finally common stockholders.
A company may have multiple preferred stock issues. Investors buy preferred stocks for dividends, just as they would buy bonds for interest income. Preferred dividends are generally paid quarterly.
Par – This is the price at which a preferred stock is issued. It is usually $25 but can be $100 or another price. Face value is similar to the face value of a bond. This is what the investor will be paid if the preferred stock is redeemed by the issuing company. Just as bond market values fluctuate, preferred stock prices fluctuate, usually in the opposite direction of interest rates in the economy. In today’s environment of rising interest rates, many preferred stocks are trading at a discount to par.
Premium/discount – The difference between the current price of a preferred stock and the face value.
Coupon – Stated yield of a preferred stock, based on face value. This is usually a fixed rate, but many large issuers have fixed-floating rate preferred shares, which could be well positioned in the current environment. In the lists below, we’re sticking to fixed rate preferences, for simplicity. A fixed coupon will be included in the name of the preferred issue.
Dividend rate – The declared yield multiplied by the face value. Series JJ of JPMorgan Chase preferred shares were issued on March 10, 2021, at a par value of $25 with a coupon of 4.55%. The annual dividend is $1.1375.
Current Yield — The annual dividend yield divided by the current market price. JPMorgan Chase preferred stock series JJ closed at $19.02 on September 28. This gave a current yield of 5.98%.
Qualified Dividends – These are dividends which, for US investors, are taxed at rates lower than their usual income tax rates. For example, a married couple’s federal income tax on eligible dividends is zero if their annual income is $83,350 or less, and the rate is 15% if their income is $517,200 or less. .
Call Date – The date on which the issuer can decide whether or not to redeem the preferred stock. The issuer may redeem all or part of such preferred series at any time after such date. If interest rates are significantly lower than when the preferred stock was issued, the issuer is likely to call. In the current environment, with interest rates rising so rapidly, redemptions are unlikely. But investors taking advantage of today’s rebates will have something to look forward to as they take advantage of high incomes – the US economy won’t grow at an accelerated pace forever. Interest rates will eventually drop again, and then preferred stock prices will rise significantly.
Maturity Date — The date on which the preferred series will be fully redeemed. Most preferred stocks these days are “perpetual”, which means there is no maturity date, although there is usually a call date. The JPMorgan Chase Preferred Stock Series JJ is a perpetual preferred stock with a redemption date of June 1, 2026.
Cumulative/Non-Cumulative — An issuer of preferred stock may be forced to suspend its dividends on one or more preferred series if it is in financial difficulty. If a preferred stock is cumulative, suspended dividends will accrue in arrears to be paid later when (or if) the dividend is reinstated. Banks and insurers issue non-cumulative preferred stock because regulators want them to have the ability to suspend dividends and never offset them, in the event of severe financial or economic distress. It is very rare for a high quality issuer to miss a preferred stock dividend payment.
Credit Rating — Preferred stocks have credit ratings, just like bonds. Some are not graded. In both lists below, all issues are rated investment grade by Moody’s and/or Standard & Poor’s. Fidelity breaks down the agency rating hierarchy.
Where to Look for Preferred Stock
Your broker or investment advisor will have lists or tools to help you select preferred shares. But you can also search for them on your own. The purpose of this discussion is not to recommend that you buy preferred stocks, or any in particular, but to show you how to obtain the information if you wish to do your own research in an area of income investing that is not is not widely covered.
QuantumOnline is a free resource for investors (who support it with donations), which lists exchange-traded income securities, including preferred stocks. For each security, it includes links to the prospectus, a dividend payment schedule and much more information. The prospectus will delve into the credit aspects of a preferred series – a company that owns more than one will have a pecking order among the preferred issues if it is liquidated.
An easy way to get started is to click on “earnings charts” and then select a listing. If you choose “All-Exchange-Traded Income Securities”, the list will include all preferred stocks, as well as other securities not covered here, including exchange-traded bonds, called “baby bonds”, which trade in units with face values that are likely to be $25.
To narrow the list, you can select “All Preferred Stock” or you can go further by selecting “Preferred Stock Eligible for 15% Tax Rate”, which is what we did for this article.
QuantumOnline cautions that there is no guarantee that the table correctly predicts which companies will favor dividends that will be considered “qualified dividends” (defined above). One reason is that if a company has an unprofitable year and pays no federal income tax, its preferred dividends may not be considered “qualified” that year by the Internal Revenue Service.
This is therefore an optimal approach to identify 469 preferred stocks that pay qualified dividends.
Preferred examples — seven transmitters
Here is a selection of seven preferred stocks expected to pay qualified dividends, all of which are traded on the New York Stock Exchange. The list includes possible capital gains on redemption, based on current par and share prices. It also includes hypothetical returns to call dates.
All of these stocks have quality ratings and face values of $25, so the data is not included. All dividends are non-cumulative and none of these preferred shares have a maturity date. Thus, the problem names have been shortened to fit in the table.
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