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I’ve been waiting for the stock market to finally wake up and realize that large-cap dividend names are not the safe havens that many investors think they are. That’s because investors were pushed out of low-or-no-yield bonds thanks to the Federal Reserve, and they rushed into equities to maintain the yields they were used to.
Naturally, those conservative investors thought putting money into legacy large-cap names that paid dividends were safe bets. The problem is that created an asset bubble, where many large-cap dividend names became very overvalued.
Now that we are in a bear market, those stocks are going to come back down to earth. The paltry 3% to 4% dividends they were paying are going to look very paltry indeed as capital losses hit 10% or 20% or more.
If you are a reader who has been following my column, you know that I have been a booster of preferred stocks for years. Instead of chasing yields with those large-cap names, you could have (and still can) park your money in preferred stocks yielding 5% or more, with virtually no volatility.
That’s because preferred stock trades like stocks but behave like bonds. That is, you can trade them on exchanges, but they move in very tight ranges like bonds. The reason is that they are more akin to bonds than stocks. They are non-voting shares of a company. Preferred stock is issued so that a company can raise capital without diluting existing shareholders but also without resorting to more debt.
Preferred Stocks, Satisfying Yields
I have three suggestions for relatively safe preferred stocks that are offering nice yields. Their ticker symbols will depend on the broker you use.
Citigroup (NYSE: C) has a number of preferred stocks. You have many choices to make here. The C series yields 5.74%. It is BB-plus rated, reflecting Citigroup’s overall liquidity and solidity. Now, the shares trade at $25.28, or about 1% over par value – meaning over the $25 per share offering price, and the same $25 per share redemption price, although Citigroup cannot redeem it before April 22, 2018.
You could choose Citigroup’s P series, which yields 7.52%, but I don’t like that as much. It trades at $27, or 8% above par, and there’s always a possibility it will trade back down to $25 and you’d lose a year’s worth of dividends via capital losses.
DuPont Fabros Technology (NYSE: DFT) has two series of preferred stocks. The only one I like is the Series B, which yields 7.54% and trades at $25.31. I should mention that this is not the DuPont chemical firm, but rather a REIT that owns, operates, manages and leases large-scale data center facilities in the United States. The centers house, power and cool the computer servers that support all of those processes, as well as provide technical services to tenants like cabling, server racks and so on.
JP Morgan Chase (NYSE: JPM) is, of course, the venerable investment and money center bank. JP Morgan also has numerous series of preferred stock, and this is quite common for financial services companies. The preferred stock issues range in yield from 5.45% to 6.19%. The higher the yield, the more above par they trade. I think you can get away with the Series G, which yields 5.95%. It presently trades at $25.63, but is not redeemable until 2020, so it should not lose much value.
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