Best Preferred Stocks for 2017
At Income Investors, we like to talk about the best dividend stocks, which are generally common stocks of dividend-paying companies. But due to the search for yield over the past couple of years, the price of high-dividend stocks has been bid up, and the average dividend yield of common stocks today is not that great. Fortunately, there is something called “preferred stocks” that can be used to improve the return of an income investor’s portfolio. In this article, we are going to take a look at the best high-yield preferred stocks for 2017.
Preferred shares represent a class of ownership in a company that has a higher claim on its earnings and assets than common shares. When the company pays dividends, it must pay its preferred shareholders before paying common shareholders. Moreover, in the event that the company’s assets are liquidated, investors in preferred stocks have prior claim on those assets before common stockholders. However, in both situations, preferred shareholders remain subordinate to bondholders.
Other than their “preferred” status, another thing that makes preferred stocks stand out is their high dividend yield. Today, the average yield of common stocks of S&P 500 companies is a measly 1.96%. However, some of the best preferred stocks’ dividend yields can easily double or even triple that.
Companies with Preferred Shares
You might not hear about preferred stocks in the news that often, but there are plenty of companies with preferred shares issued in addition to their common shares. And this shouldn’t really come as a surprise.
Preferred shares provide a unique way for companies to raise capital. They help companies achieve a lower debt-to-equity ratio and don’t need to follow the same guidelines as debt repayment because they are equity issues. Preferred shares that are callable can also be purchased back by their issuers at a predetermined price after a set date.
If you look at the companies with preferred shares issued, you would find that most of them are in the financial services sector. Banks, diversified financial services companies, and insurance companies are some of the most frequent issuers of preferred stocks, but they are not the only ones. Investors can also find preferred stocks from other industries, such as real estate, utilities, telecom, and energy.
Before investing in preferred stocks with dividends, it’s important to look beyond the original coupon rate and the current yield. Some companies may offer very attractive coupons on their preferred stocks, but if their underlying business is not sound, they might not have the ability to make those dividend payments. And although preferred shareholders have a claim on a company’s assets before common shareholders if the company is liquidated, they remain subordinate to bondholders. Therefore, it is of utmost importance to check if the company’s business is solid enough to meet its preferred dividend obligations before investing in preferred stocks.
Now, let’s take a look at the five best high-yield preferred stocks for 2017.
Preferred Stock List and Their Yields
| Preferred Stock Name | Ticker Symbol | Dividend Yield |
|---|---|---|
| Wells Fargo & Co 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L | WFC.PRL | 5.96% |
| JPMorgan Chase & Co 6.125% Non-Cumulative Preferred Stock, Series Y | JPM.PRF | 5.64% |
| Welltower Inc 6.50% Series J Cumulative Redeemable Preferred Stock | HCN. PRJ | 6.43% |
| Allergan PLC. 5.50% Mandatory Convertible Preferred Shares, Series A | AGN.PRA | 6.52% |
| National General Holdings Corp 7.50% Non-Cumulative Preferred Stock, Series A | NGHCP | 7.28% |
High-Yield Preferred Stocks
1. Wells Fargo & Co 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L
Wells Fargo & Co (NYSE:WFC) is a familiar name to income investors. It is the third-largest bank in the U.S. with $1.9 trillion in assets. With $1.5 trillion in retail brokerage client assets, it is also the third-largest U.S. retail brokerage firm.
Wells Fargo is well established in the retail banking industry, providing banking, investments, insurance, mortgage, and commercial and consumer finance services to millions of customers. The company has more than 8,600 locations, 13,000 ATMs, and offices in 42 countries and territories. Retail banking may not sound like an exciting business, but due to its high barriers to entry, Wells Fargo has been making handsome profits for quite some time.
In the first quarter of 2017, the bank’s net interest income grew five percent year-over-year to $12.3 billion. Total average loans increased four percent from the first quarter of 2016, while total average deposits increased seven percent. A growing portfolio of loans and deposits could translate to higher net interest income in the future. (Source: “Wells Fargo Reports $5.5 Billion In Quarterly Net Income,” Wells Fargo & Co, April 13, 2017.)
Wells Fargo’s common stock is currently yielding 2.90%, but investors of its preferred stocks can collect a lot more. For instance, Wells Fargo & Co 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L (NYSE:WFC.PRL) is currently yielding 5.96%. Dividends of this preferred stock are paid on the 15th day of each March, June, September, and December. This series of preferred stocks has a liquidation preference of $1,000 per share.
2. JPMorgan Chase & Co 6.125% Non-Cumulative Preferred Stock, Series Y
JPMorgan Chase & Co. (NYSE:JPM) is a multinational banking and financial services holding company headquartered in New York City. It is one of the oldest banks in the country, with more than 200 years of operating history. Today, JPMorgan is the largest bank in the U.S. with $2.5 trillion in assets. It is also the world’s most valuable bank, commanding over $300.0 billion of market cap.
Despite being around for over two centuries, JPMorgan’s business is still growing. In the first quarter of 2017, net revenue increased six percent year-over-year to $25.6 billion. Net income came in at $6.4 billion, a 17% increase from the year-ago period. (Source: “JPMorgan Chase Reports First Quarter 2017 Net Income Of $6.4 Billion, Or $1.65 Per Share,” JPMorgan Chase & Co, April 13, 2017.)
JPMorgan’s common shares have climbed quite a bit. In the past 12 months, JPM stock is up nearly 37%. However, the dividend yield on its common shares currently stands at a not-so-impressive 2.34%. Fortunately, the company has also issued several series of preferred shares. JPMorgan Chase & Co 6.125% Non-Cumulative Preferred Stock, Series Y (NYSE:JPM.PRF) is currently yielding 5.64%. The preferred stock has a redemption value of $25.00 per share and a call date of March 1, 2020. JPMorgan makes quarterly dividend payments to holders of its Series Y preferred stock, usually on the first day of March, June, September, and December of each year.
3. Welltower Inc 6.50% Series J Cumulative Redeemable Preferred Stock
Other than financials, quite a few real estate companies have issued preferred shares. One series of preferred stock from Welltower Inc (NYSE:HCN) is worth taking a look at.
Welltower is a real estate investment trust (REIT) specializing in healthcare infrastructure. The company invests in outpatient medical properties, seniors housing, and post-acute communities. Its current portfolio consists of around 1,400 properties in major, high-growth markets in the U.S., Canada, and the U.K. Welltower is a component of the S&P 500.
The company has been investing in healthcare for over 40 years and its business is still growing. In 2016, Welltower’s normalized funds from operations increased four percent from 2015 to $4.55 per share, and its normalized funds available for distribution increased six percent to $4.08 per share. (Source: “Welltower Reports Fourth Quarter 2016 Results,” Welltower Inc, February 22, 2017.)
The key to note here is that the demand for healthcare is relatively inelastic to how the economy is doing, meaning healthcare REITs like Welltower are essentially in a recession-proof industry. Also, with the aging population in the U.S., the demand for long-term care could be increased.
Welltower’s common stock already pays generous dividends with a 4.68% yield. But Welltower Inc 6.50% Series J Cumulative Redeemable Preferred Stock (NYSE:HCN.PRJ) has an even more impressive 6.43% dividend yield. Dividends on the preferred stock are cumulative and are paid on or about the 15th day of January, April, July, and October of each year.
4. Allergan PLC. 5.50% Mandatory Convertible Preferred Shares, Series A
Allergan plc (NYSE:AGN) is a multinational pharmaceutical company headquartered in Dublin, Ireland. The company is a growth pharmaceutical that focuses on developing, manufacturing, and commercializing branded pharmaceuticals, devices, and biologic products to patients around the world.
The company markets a portfolio of products for the central nervous system, eye care, medical aesthetics and dermatology, gastroenterology, urology, anti-infective therapeutic, and women’s health categories. Allergan currently has 16,000 employees and operations in about 100 countries.
The Allergan we know today was formed on February 18, 2015, when the company formerly known as Actavis plc changed its name. Actavis plc has become the American Generics division of the current Allergan.
Of course, the focus here is not Allergan’s common stock. Instead, we are looking at Allergan PLC. 5.50% Mandatory Convertible Preferred Shares, Series A (NYSE:AGN.PRA). Dividends on this series of preferred shares are payable on a cumulative basis at an annual rate of 5.5% on the liquidation preference of $1,000 per mandatory convertible preferred share. Dividends are paid quarterly on the first of March, June, September, and December of each year. The maturity date is going to be March 1, 2018.
Trading at $837.42 apiece, Allergan PLC’s Series A preferred stock is currently yielding 6.52%.
5. National General Holdings Corp 7.50% Non-Cumulative Preferred Stock, Series A
National General Holdings Corp (NASDAQ:NGHC) is a specialty personal lines of insurance holding company. It provides personal and commercial auto insurance, recreational vehicle and motorcycle insurance, supplemental health insurance, and other niche insurance products.
The company has grown its business quite a bit recently. In the fourth quarter of 2016, National General’s gross written premium grew 20.7% year-over-year to $818.7 million, while net written premium increased 19.8% to $740.5 million. Service and fee income increased 9.4% year-over-year to $108.6 million. Growth in premiums and service and fee income helped drive the company’s total revenue up 31.0% to $985.5 million in the fourth quarter. (Source: “National General Holdings Corp. Reports Fourth Quarter 2016 Results,” National General Holdings Corp, February 27, 2017.)
National General Holdings Corp 7.50% Non-Cumulative Preferred Stock, Series A (NASDAQ:NGHCP) was issued in 2014 at an annual rate of 7.50%. The payments are usually made on the 15th of each January, April, July, and October. The call date is July 15, 2019, and there is no maturity date. Trading at $25.77 apiece, this preferred stock has a very impressive dividend yield of 7.28%.