10 Preferred Stock Picks for Income Investors

Preferred stocks are considered a hybrid security, as they offer the best characteristics of both equities and bonds in one investment. Yields are typically higher than traditional bonds, and the dividends have added safety as they have a preference over common stock payouts. Three income specialists and contributors to MoneyShow.com highlight 10 preferred stock ideas for conservative investors. Harry Domash, Dividend Detective Given this turbulent market, this would be a good time to consider preferred stocks. Yes, they'll drop if the market plunges, but not as much as common stocks. And, when the market stabilizes, properly chosen preferreds will move back up to their normal trading ranges. Meanwhile, you'll be collecting dividends equating to 4% to 7% annual yields. By properly chosen, I mean preferreds that are issued by corporations that won't run out of cash to pay the specified dividends. The four preferreds that I'm going to describe below meet my properly chosen criterion. About Preferreds Corporations issue preferreds to raise cash. Although they can be sold at any price, most are issued at $25 per share and pay dividends equating to 3% to 7% annual yields. Preferred share prices vary with supply and demand and in normal markets; typically move up to the $27 to $28 per share trading range. Most preferreds can be called (redeemed) five years later at the issue price. However, the issuer doesn't have to call the preferreds at the call date. In fact, many preferreds are not called for years after the call date. The decision about when to call preferreds typically hinges on whether a corporation can replace them with new preferreds paying lower interest rates. The dividends issued by regular corporations are considered qualified dividends and are subject to the maximum 15%/ 20% dividend tax rate. Preferreds issued by tax-exempt firms such as real estate investment trusts are taxed as ordinary income. Unlike common stocks, preferred stock ticker symbols are not standardized and vary from broker to broker. Enter the issuer's company name and use your broker's ticker lookup function to find the correct ticker. Preferred Terminology Market yield is the return based on the current trading price. For instance, the market yield for a preferred trading at $26 per share and paying $2.00 per share annually would be 7.7%. Yield-to-call is the average annual return you would earn if your preferreds were called at their call price on their call date. In practice that's a worst case scenario because preferreds aren't usually called that soon. Here are four preferreds that meet my selection criteria. All were issued at $25 per share. As always, do your due diligence, the more you know about your stocks, the better your results. Compass Diversified Holdings 7.875% Series B : Compass Diversified Holdings is a private equity firm that holds a variety of mid-sized industrial and consumer product companies, all based in North America. Based on its recent $26.20 per share trading price, its market yield is 7.5%. Yield to call based on its April 30, 2028 call date is 7.8%. Its dividends are taxed as ordinary income. Bank of America 4.750% Series SS : Bank of America , with 4,200 offices, is one of the world's largest financial institutions. These preferreds, rated investment quality (BBB-) by Standard & Poor's, recently traded below their $25 call price at $24.66 per share. Thus, their market yield, at 4.8%, is slightly higher than the 4.75% coupon rate. Based on their 2/17/27 call date, yield to call is 5.1%. Its dividends are taxed at qualified rates. Apollo Global Management 6.35% Series A . Apollo Global Management -- formerly Athene Holding -- is an alternative asset manager. It raises capital for, invests in, and manages alternative investment vehicles, including private equity and credit activities. These preferreds, rated investment quality (BBB-) by S&P, recently traded at $26.96 per share. The market yield in 5.9% and the yield to their 6/30/29 call date is 5.1%. Dividends are taxed at qualified rates. U.S. Bancorp 4.50% Series O : U.S. Bancorp , the 6th largest U.S. bank by deposits, USB offers traditional banking, wealth management, securities, insurance, and payment services. Its preferreds rated investment quality (BBB+) by S&P, recently traded below their call price at $23.29 per share. The market yield is 4.8% and the yield to its 4/15/27 call date 6.1%. Dividends are taxed at qualified rates. Marty Fridson, Forbes/Fridson Income Securities Investor Federal Agricultural Mortgage Corp. , also referred to as Farmer Mac, is a government-sponsored enterprise (GSE). AGM is part of the Farm Credit System, established by Congress to improve the availability of long-term credit for U.S. farmers. All of AGM's preferred securities are issued by an agency of the U.S. government, which implies low credit risk. Dividends on Federal Agricultural Mortgage Corp. 4.875% Fixed Rate, Non- Cumulative Series G Perpetual are qualified and taxed at the 15%-20% rate. This issue may be called on 07/17/26, or any time thereafter, at par plus any declared and unpaid dividends. AGM reported 3Q 2021 core net income of $27.6 million or $2.55 per share, essentially flat with a year ago. Results missed analysts' $2.62 estimates, but nonetheless were solid for the quarterly period. Net interest income of $55.0 million was a key driver, climbing 23.2% year over year. We recommend AGM's 4.875% preferred as a suitable investment for low- to medium-risk taxable portfolios. Dividends are taxed at the 15%-20% rate. Buy at $25.00 or lower for a 4.875% current yield and a 4.875% yield to call. JPMorgan Chase & Co. is a leading global financial institution with $3.8 trillion in total assets and $3.1 trillion in assets under management (AUM). The company posted strong 4Q 2021 net income of $10.4 billion or $3.33 per share, on solid investment banking revenue and soaring M&A fees. Driving core earnings momentum from a year earlier was a sharp 37% jump in revenue from Global Investment Banking, along with a 16% increase in Asset & Wealth Management revenue. AUM climbed a solid 15% from a year ago to $3.1 trillion on the strength of equity markets. JPMorgan Chase & Co. 4.20% Fixed Rate, Non-Cumulative, Series MM Perpetual is callable on 07/30//26, or on any dividend payment date thereafter, at par plus any declared and unpaid dividends. Dividend distributions are qualified and taxed at the 15%-20% rate. This investment is suitable for low- to medium-risk taxable portfolios. Buy at $23.50 or lower for a 4.47% current yield and a 5.73% yield to call. PennyMac Mortgage Investment Trust is a specialty mortgage finance REIT with a comprehensive mortgage platform, investing in residential mortgage loans and mortgage-related assets. PMT's objective is to provide attractive risk-adjusted returns over the long-term. PennyMac Mortgage Investment Trust 6.750% Fixed Rate, Cumulative, Series C Perpetual may be redeemed in whole or part on the initial 08/24/26 call date, or any time thereafter, at par plus any accumulated and unpaid dividends. PMT reported a 4Q 2021 net loss of $27.3 million or ($0.28) per share, falling well short of analysts' $0.49 estimates. Results were negatively affected by sharply rising interest rates and yield curve flattening. We look for earnings and revenue momentum to gain traction later in the year. This preferred issue is suitable for high-risk tax-deferred portfolios. Dividends are taxed as ordinary income. Buy at $23.75 or lower for a 7.10% current yield and an 8.07% yield to call. Rida Morwa, High Dividend Opportunities We are recommending two defensive picks -- both preferred shares -- with yields up to 7.8%. Picks like these calm those nerves during extreme market volatility and let you sleep well at night. Preferred securities offer excellent defense for an income portfolio. If purchased below par-value, they can experience capital gains over time and provide the opportunity to lock in high yields to hold through an extended period of paltry interest rates. Hersha Hospitality Trust, 6.50% Series E Cumulative Redeemable Perpetual Preferred Shares is a cumulative, redeemable preferred security from a leading hotel REIT that owns and operates 33 premium hotels in urban gateway markets and regional resort destinations. The issuing company, Hersha Hospitality Trust , recently reported Q4 2021 earnings on Feb. 16. Hotels were among the hardest hit by the global pandemic for obvious reasons. Since March 2020, HT's common dividends remain suspended. Despite that, insiders own 15.9% of the common stock. When management has such high confidence over the REIT's common stock, we can rest assured with the dividend-paying preferred securities. There are three classes of which class E currently has the highest capital upside and the highest yield. It is noteworthy that HT suspended preferred dividends in April 2020, and management worked hard to cut costs, improve occupancy rates, and survive the pandemic. All preferreds are now current in their distributions (including payment of missed dividends). During Q4, HT reported 63.1% occupancy, an Average Daily Rate of $238.3, and RevPAR of $150.4. The REIT maintained positive property cash flow throughout the year and reported positive FFO for the first time since the pandemic. With Covid restrictions in the rear-view mirror, HT has survived these challenging times. It is now time to thrive, and we expect the REIT's performance to improve in the coming quarters and a restoration of the common dividend. As that happens, we can sit within the comfort of the preferred dividends, which offer a sizable 7.8% yield with 20% capital upside. Our next pick also comes from the travel & lodging sector RLJ Lodging Trust, $1.95 Series A Cumulative Convertible Perpetual Preferred Shares . The issuing company, RLJ Lodging Trust , owns and operates 97 hotels with ~21,500 rooms in 22 states with high exposure to sunbelt locations - among the best vacation destinations in the country. RLJ operates its hotels under well-recognized global brands such as Courtyard by Marriott, Residence Inn by Marriott , Hilton Garden Inn, Homewood Suites by Hilton , Hyatt Place , Wyndham , and Embassy Suites. The company recently reported Q4 2021 earnings on February 23rd. After a strenuous two years of the global pandemic, RLJ achieved positive FFO last year. RLJ-A is the ultimate lodging REIT preferred stock for income investors. The reason -- it has no call date and is, therefore, an almost perpetual cash machine. This preferred pays $1.95 in annual dividends, making it a 7.3% yielder at recent prices. Though the company suspended common dividends to survive during the pandemic, it has consistently made payments to preferred shareholders. Is RLJ-A truly uncallable? In theory, RLJ-A is convertible into 0.2806 common shares in RLJ (at the initial conversion price of $89.09 per common share). However, RLJ cannot force conversion unless their common shares are trading at 130% of the conversion price for 20 of any 30 consecutive trading days. This calculates to a common stock price of $115.82. Today, RLJ trades at $14, so the preferred isn't callable until the common stock experiences a massive 720% gain. And when converted, RLJ-A shareholders would receive $32.50/share, ~22% upside from current levels. In my view, RLJ-A is significantly undervalued today. Sit back and watch the U.S. travel industry recover while collecting a handsome 7.3% yield. Meanwhile, if I was operating a preferred ETF for exposure to a broad range of preferred stocks, it would look a lot like Virtus InfraCap U.S. Preferred Stock ETF . What sets this fund apart from its peers is active management and a focus on higher-yielding preferred shares. Over the past year, PFFA has materially outperformed peers like iShares Preferred & Income Securities ETF . Why? Active management. PFF is buying shares just because they're part of an index. There's no human looking at it and saying, Wait a minute, that price is too high! In the preferred market, where trading volumes are low and investments can be redeemed by the issuer at par value, it's essential to buy at a good price. Over the past year, we have seen cases where some preferred were trading at a negative yield-to-call, meaning that if the issuer called them investors actually lost money. PFFA avoids this through the very simple means of having someone look at the price and do the quick math to see if it's a good price. For investors looking for quick exposure to preferred, PFFA is an excellent option. In January, PFFA raised its dividend to $0.1625/month, and the dividend is fully covered by current cash flow. I don't always buy preferred ETFs, but when I do it's Virtus InfraCap U.S. Preferred Stock ETF.

10 Preferred Stock Picks for Income Investors

Given the turbulent market, it's a good time to consider the relative safety of preferred stocks.

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