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The Preferred Way to Invest

February 14, 2019

Preferred shares are a different kind of stock. They tend to be more stable than common stock because they act more like a bond than a stock.

Their yields are higher than typical corporate bonds, and their stock prices don’t move a great deal, which makes them a great investment right now.

They got their start back in the 19th century as railroads were seeking to expand their networks westward and needed capital. But many of the railroads were already up to their ears in loans and bonds, so banks were reluctant to offer more bonds, and investors were leery of more stock issuances.

The solution was a hybrid—a security that would be sold as equity but with higher dividend payments than bonds. And if the railroads failed, preferred investors would be just behind bond holders in getting paid.

Since then, thanks to evolving credit, accounting and tax rules, preferreds have become ideal for companies to issue as additional forms of capital.

But there are a lot fewer preferreds than common stocks available, which is one of the things that makes them attractive for us. They tend to stay under the radar of most traders. That makes them great for individual investors that seek less volatility and more certainty of higher dividend payments.

And they perform. For the past five years, the S&P Preferred Stock Index has shown a total return of 30.49%, for an annual equivalent return of 5.47%.

Preferreds Perform: S&P Preferred Stock Index Total Return, Source: Bloomberg

This means that the security of preferred shares is no major sacrifice when you include their dividends.

Now, with growth expectations for earnings slipping in the stock market and with volatility rising, a collection of individual preferred stocks is a good choice for 2019.

Remember, they don’t trade with much volume because they tend to be bought and held—not traded. So, when placing orders, use a limit near the current quote.

And it’s best to buy the trio of preferreds outlined below together. Diversifying your allocation will limit your risk and will make it easier to buy them in smaller sums, at better prices.

To make sure you are getting the right securities, I’ve provided the symbols for each of the recommended preferreds along with the CUSIP or ISIN numbers.

My Preferred Preferreds

Seaspan Corporation (SSW) is sort of a real estate investment trust (REIT) of container ships. It leases out its ships to various companies on long-term contracts. As such, it focuses on making contracts with viable, operating shipping companies to maximize revenues from its fleet while controlling the risk of default.

It has a series of preferred shares as part of its capital. The security to buy is the 7.875% Series H Preferred (SSW.PH, CUSIP# 81254U304) that is currently trading at $23.49 for a yield of 8.38%. This preferred is perpetual, meaning that there is no maturity. However, there is an option for the company to buy it back at $25.00 starting on August 11, 2021.

Teekay LNG Partners (TGP) is a passthrough that’s focused on shipping liquified natural gas (LNG) as well as other petroleum products. I’ve been writing in recent issues of Profitable Investing about the attractiveness of the LNG market, particularly with the expanded production of natural gas in the US and the expansion of pipelines and marine terminals for LNG export to Europe and Asia where LNG is in high demand.

The company has two preferreds in the market. I recommend the 9.00% Series A Preferred (TGP.PA, ISIN# MHY8564M1131). It’s another perpetual maturity with a call on October 5, 2021 at $25.00. It’s trading at $24.90, with a yield of 9.04%.

Finally, NuStar Energy (NS) is a passthrough company with 8,700 miles of pipeline for refined petroleum products, with additional pipelines for crude oil and other petroleum-related products. The common stock has been a member of the Profitable Investing model portfolios in years past.

It has a series of preferreds as part of its petroleum logistics. I’m recommending the 8.50% Series A Preferred (NS.PA, CUSIP# 67058H201). It has a fixed dividend of 8.50% through December 15, 2021, at which time it will shift to an adjustable dividend at the US 3-month Treasury yield plus 6.766%. The preferred is currently trading at $23.10 for a yield of 9.19%.