Utility Preferreds: Safe High Dividends
While most banks are paying less than 1% on CDs, many preferred shares
issued by utility companies are paying 5% to
6% dividend yields.
Utilities, banks, insurance companies, real estate investment trusts
and others sell preferreds to raise cash. Usually, preferred share
prices don’t move much. Most are issued at $25 and prices typically
range between $24 and $27. However, when an industry is out of favor,
just as happened with banks around the end of last year, preferreds
might trade below that range, creating capital appreciation
In this column, I’ll focus on finding preferreds issued by utilities
paying dividends equating to 6% to 7%
yields. I picked utilities because regardless of what happens as a
result of politicians driving the economy over the "fiscal cliff,"
most utilities will chug along and meet their debt obligations.
Here are some things you need to know about preferreds.
Most preferreds are “callable” meaning that the issuer has the right
to call (redeem) them at the “call price,” which is usually the
original issue price. The shares can be called at any time after the
“call date.” You would enjoy $1 per share capital appreciation if you
bought shares at $24 that were called at $25. Conversely, you’d lose
$1 per share if you paid $26 for the same shares. Thus, if you pay
more than the call price, confirm that call date is far enough into
the future that the cumulative dividends that you receive more than
make up for the potential capital loss. Your yield is the next
12-month’s dividends divided by the price you pay for the
shares. "Yield to call" is the average annual yield if preferreds were
called on the call date.
Use Quantum Online (www.quantumonline.com)
to find and research preferreds. You can use Quantum’s screener to
find candidates. Click Income Tables and then select Income Securities
Screening Form to access the screener.
Leave everything that you’re not interested in on the form blank. I
selected Utilities for Company Type and “Baa2” for minimum Moody’s
Credit Rating. Moody’s rates preferreds using a complicated series of
letters and numbers. Fortunately, Quantum lists the possible ratings
on its screening form. The Baa2 rating is Moody’s second lowest
“investment grade” rating. I also specified "call dates equal to or
greater than 9/26/2015" to limit the list to preferreds with call
dates at least three year out.
Quantum listed four preferreds meeting those requirements. In addition
to Moody’s, the screener also lists the Standard & Poor’s credit
ratings which often differ from the Moody's ratings. Avoid preferreds
with ratings shown in red (non-investment grade) for either rating
agency. Click on the preferred ticker symbols to see Quantum’s
description. Click on any term with a link to see Quantum’s definition
of that term.
Besides for Quantum’s information, you’ll also need the current
trading price, the dividend yield based on the current price, and the
average trading volume. You can get them on TDAmeritrade (www.tdameritrade.com).
You don’t have to be a TDAmeritrade customer. Simply enter the
preferred ticker symbol in the Quotes box. If you're going to buy
around 100 shares, rule out preferreds with average daily trading
volumes less than 2,000 shares. Require at least 5,000 share average
daily trading volume if you're planning on buying 500 or more shares.
Here are the preferreds turned up by the screen along with the yields
from TD Ameritrade.
• Alabama Power 6.45% Series Non-cumulative
(ticker ALBMP), current yield 5.7%
• Alabama Power 6.50% Series Non-cumulative
(ALAWP), current yield 5.4%
• Entergy Arkansas 5.75% Series First
Mortgage (EAA), current yield 5.2%
• Georgia Power 6.50% Series 2007A (GAPWP),
current yield 5.7%
When I looked, the Georgia Power preferreds were only trading around
500 shares per day, which it too low.
Unlike common stocks, preferred ticker symbols are not standardized.
Your broker may use a different symbol. Use your broker’s symbol
lookup function and enter the issuing company name to see a list of
all preferreds issued by that company.
Research the issuing company to learn if there are any problems that
might cause it to suspend its preferred payouts. The more you know
about the issuer’s outlook, the better your results.