Building a foundation of safe and reliable income producing securities.
Income investors have many choices of securities that offer a range of low to high yields.
Consider preferred stocks with investment grade ratings from Moodys and S&P.
Introducing the highest yielding investment grade cumulative preferred stocks.
Is it time to add more income producing securities to your portfolio?
As an income investor, I feel that it is very important to diversify my holdings and to build the portfolio on a strong foundation of securities that are relatively safe and have the ability to pay a reliable and sustainable distribution. Over the last 10 years I have slowly created a portfolio with preferred stocks & ETD securities as the foundation from which I build upon. It is no secret that there are many risk levels within each asset class and type of investment. That includes preferred stocks and ETD securities. If an investor is looking to reduce his or her risk, one good place to start is by looking at the Moodys and S&P ratings to find Investment Grade securities.
This article will focus on reviewing thecumulative traditional preferredstockswith the highest yields that are currently available from the list of over 600 preferred stocks & ETD securities that I track in the IPI (I Prefer Income) database. I will then review each company and the ratings assigned to their preferred stocks. We can then compare each with 4 important areas of analysis: earnings, payout ratios, debt ratios and dividends.
MoodysandS&P(Standard & Poors) are 2 of the big 3 credit rating services in the U.S. They both originated over a 100 years ago; and in 1975, they were both identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S Securities and Exchange Commission. The rating services are used to rate stocks, bonds, preferred stocks and government agencies. They assign ratings on the basis of assessed risk and the borrowers ability to meet its financial commitments. The top tier of ratings is considered as Investment Grade ratings and have the following ratings starting with highest rating on the left.
Moodys Investor Services / Investment Grade Ratings
S&P Financial Service / Investment Grade Ratings
Please note that the ratings assigned to the securities in our list may not be correct. They can frequently change and we are not able to maintain current ratings. I obtain the ratings fromQuantumonlineand even they point out that they are not able to keep the ratings current. It is left to the investor to verify the rating from their own sources. These ratings provide a good starting point and with the metrics we provide and other resources, the investor is better able to make investment decisions.
Highest Yielding Investment Grade Preferred Stocks
There are currently 237 Investment Grade rated securities in theI Prefer Incomedatabase. These include 82 ETD (baby bonds), 8 trust preferreds, 73 non-cum preferreds and 74 cumulative preferred stocks. This article will focus on cumulative preferred stocks with a market price below $25.10 that have a yield above 5.3% and are rated as Investment Grade by either Moodys or S&P. Remember that I cannot guaranty that these ratings are current as they change frequently. Investors who are interested in any of these issues may want to verify that rating with their broker or other reputable source, including the 2 rating agencies.
It is not my purpose to do an in-depth analysis of each of the preferreds stocks in the list, but to bring overall awareness to the preferred stocks with the highest yields. This article identifies 16 preferred stocks issued by 10 companies in 3 different industries. I will then do a general comparison of each company and stock to show their yields and many of the financial metrics that investors can use to analyze them. Every investor has their own goals and their own investment requirements. I hope that this review will help identify a few companies and preferred stocks that you might be interested investing in; or at least finding one or more candidates to continue doing further research.
The tables list the parent company first in the yellow and gray row. Directly under each parent are the preferred stocks that they have issued. All preferreds are traditional cumulative issues with par values of $25. The columns provide information and financial metrics to help determine the overall health of the parent company. Let me go over a few of these metrics:
GAAP Profit & Loss:The first 2 columns in yellow list the number of years and quarters the company has been profitable in the last 5 years and 5 quarters. This is using GAAP earnings. Keep in mind that Non-GAAP earnings or cash flow may be more important, but all companies must report GAAP so it is an important starting point.
There are 2 sets of numbers. Example is (3) 2 2 (3). The first set of 2 numbers indicates the earnings for the last 5 years. The 2ndset of 2 numbers identifies the earnings for the last 5 quarters. The first number in each set is profits and the 2ndnumber in each set is losses. I then place a ( ) around the result for the last period. So if the last year was profitable, I put the ( ) around the first number. If the last year was a loss, I put ( ) around the last number. So (3) 2 2 (3) means that the company had 3 years of profits and 2 years of losses. The last year was profitable. It also had 2 quarters of profits and 3 quarters of losses. The last quarter showed a loss.Type Payout:This identifies whether or not the payout ratios are determined by GAAP or Non-GAAP metrics. GAAP earnings are identified by EPS (earnings per share). There are a variety of Non-GAAP earnings that companies use, including FFO (Funds From Operations), AFFO (Adjusted Funds From Operations), and others. The purpose of payout scores is to determine the ratio of earnings or cash flow to the dividend. A score below 1 tells us that the company is earning enough to cover the dividend. A score over 1 tells us the company is not earning enough to pay the dividend. That is a warning to investors that a change will have to happen to improve that score. The company will either have to improve their earnings, lower the dividend or pull money from other internal sources to pay the dividend.
3 Payout Ratios:There are 3 payout ratios. All are based on TTM (trailing twelve month) data. The first isstock dividend payout. This means the ratio is based on the common stock dividend. If the company does not pay a dividend, then there is no payout score. Remember that the common stock dividend provides a buffer for the preferred stock dividend. The company cannot stop or delay the preferred dividend until they have first stopped paying the common stock dividend.
The second payout ispreferred dividend payoutratio. This compares the preferred dividend to the earnings that is used to pay the dividend. On the balance sheet, this comes before EPS is determined. This is an important difference between EPS and the earnings used to pay the preferred stock.
The final payout ratio is thepreferred dividend to operating cash flowratio. One of the important functions a company performs is to create cash flow. The more it provides, the better it is able to operate and grow their company. There are several cash flow metrics used to identify this, including operating cash flow and free cash flow. This metric uses operating cash flow to determine the ratio. I consider payout ratios to be one of the most important metrics used to determine if a company will be able to pay the common and preferred dividend on a sustainable basis.
Debt Ratios:There are 3 different debt ratios, includinginterest coverage,debt to EBITDAanddebt to equity. Debt is a very important part of business. The lower the debt, the better able a company can operate in good and tough economic periods. Investors should pay attention to debt. If it is too high, it is a warning to be careful. Most companies incur debt to operate and grow their business. A company with high debt may not be able to borrow money to grow; or if it can borrow, it may be charged higher rates than a company with lower debt.
Metrics involving dividends and yields: If a company pays a common stock dividend, it tells us that the company is earning enough to distribute some of the available cash to their shareholders. This is good. Without a dividend, there is no yield. The 10 Year median yield metric gives the investor an opportunity to compare the median to the current yield. If the current yield is higher than the median, it gives us a different picture than if it was lower than the median. It may not be important if there is a slight difference, but if there is a large spread, it could provide a clue to their overall health. If I see that the current yield is much higher than the median, then I logically wonder why is the yield higher now than it averaged over the last 10 years?
The3 Year average yearly dividend growthtells us if the company has been growing their common stock dividend or not. Growth is good, negative growth could identify a problem. TheDividend Diamondmetric tells us how many consecutive years a company has increased their dividend 5 or more years in a row. It is exciting to see 8 of the 10 companies in this list are designated as Dividend Diamonds.
Miscellaneous metrics and info: There are other metrics that I report on at the IPI website, but for this article I only showPrice to Bookratio. I wont discuss it, but readers can review it. I find it interesting that all of the companies have premium price to book ratios, which probably means the companies are in favor right now. There are also other fields in the table, including Float, 15% Tax, Coupon Rate, Call Price, Rating, and K-1. All are important and add to the information investors may want to know.
I break down the metrics analysis into 4 areas: 1.Earnings, 2)Payout ratios, 3)Debt ratiosand 4)Dividends. Ok, it is time to review the list containing the highest yielding cumulative preferred stocks.
Thereare 16 preferred stocks that meet the criteria we listed. These have been issued from 10 different public companies in 3 industries. 8 of the 10 are REITS, 1 is an insurance company and 1 is a bank. The yields range from 5.2% to 5.9% (EPR-G). 13 of the 16 preferreds are double rated. The highest rated preferred stocks are PSA-W, PSA-X and BXP-B. Moodys assigned a A3 rating to both PSA preferreds and S&P assigned an A- rating to BXP-B.
Earnings:When I look at the financial metrics, the first thing I look at is GAAP earnings in the first 2 yellow columns. It is immediately apparent that all companies; but one, have perfect earnings records of 5 profitable years and 5 profitable quarters. Only RNR-E has less than perfect record with 4 profitable years and 3 profitable quarters. The interesting thing about the earnings is that 8 of 10 companies also report Non-GAAP earnings or cash flow. For these companies, Non-GAAP is a better measure of their earnings and ability to pay their distributions and in most cases, will be better than GAAP earnings.
Payout ratios:All 10 companies pay dividends to their shareholders and all 10 have dividend stock payout ratios substantially below 1. But even more important is that they all have preferred stock dividend payout ratios of under .20. And finally, the preferred dividend to operating cash flow ratios are even better. These 3 payout ratios show that all 10 have earnings well over the stock and preferred dividend, which bodes well for shareholders.
Debt Ratios:There are 3 debt ratios. We want interest coverage ratio to be high to show earnings are enough to cover the interest on the debt. Then we want low debt to EBITDA and debt to equity because low debt is good and high debt is bad. High debt is not good, but if debt is too low it might mean they are not incurring debt to grow.
Dividends:We start this review with the knowledge that all 10 parent companies pay a common stock dividend. We can then compare the 10-year median yield to the current yield to determine if anything is out of order. If the current yield is substantially higher than the 10 median yield it could mean that investors are demanding higher yields to invest. If the current yield is lower than the 10-year median, then the opposite could be true. The only company that has a current yield substantially higher than the 10-year median is KIM. It is no secret that retail REITS are not in favor in this market. It appears that prices have dropped to reflect that concern.
Now look at the 3-year average yearly dividend growth. All 10 companies have an excellent record of increasing their dividends over the last 3 years. And the last factor to look at is the dividend diamond column. There are 8 companies out of 10 that are designated as dividend diamonds. This means that they have been increased their dividend every year for at least 5 years. 3 have records of over 20 consecutive years of increases and FRT has increased their dividend 41 years in a row!
In summary, these 10 companies have an excellent record in all 4 areas of analysis. I can see why they have Investment Grade ratings from Moodys and S&P.
During the last 3 months of 2018, the market dropped into bear territory. With the scare of rising interest rates, preferreds stocks and other interest sensitive securities fell along with the market. However, 2019 has been a very positive story with many preferreds returning to their previous highs after the fed made it clear that interest rates would stabilize. Even with new highs, there are still many relatively safe and reliable preferred stocks that are available with high yields. This article introduced thehighest yielding cumulative preferred stocks with investment grade ratings. All 16 issues have prices under par and yields above 5.2.
Our general analysis of this group of preferreds show excellent financial results and suggest that all companies are doing well and are financially sound and have the ability to pay their dividends in a reliable and sustainable basis. With the economy doing well and interest rates low and dropping, preferred stocks offer some great values and appealing yields. Take a close look at the list. You may find one or more gems that can be added to your portfolios.
Disclosure: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered as a recommendation. Individuals should determine the suitability for their own situation and perform their own due diligence before making any investment
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Disclosure:I am/we are long EPR.PG, KIM.PJ, NNN.PF, PSA.PW.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.