Nearly every day, I hear from my newsletter subscribers expressing concern about a possible stock market “crash.”
The crash prediction gig is a good one, with excellent compensation and no accountability. Still, whether or not the markets are due for a tumble, we should be aware of the risks in our portfolios and have some safe harbor investments that will help carry us through the next big downturn, whether it comes next month or a few years from now.
During the last crash (early 2020 and predicted by no one), I helped my subscribers get started investing in individual preferred stocks.
Preferred stocks bring a unique combination of safety and yields to your portfolio. With the right knowledge and research, you can put together a list of solid preferred stocks that yield 6.5% to 7.5%.
The safety factor requires an understanding of how preferred stocks operate. Preferred shares get their name because this class of equity has preference over common shares dividends. Put another way: if a company wants to pay common share dividends, it must pay the preferred share dividends. This factor makes it easy to determine the safety of your preferred dividends. If the company is paying common stock dividends, the preferred dividends are safe.
For example, in the early days of the pandemic, hotel REIT RLJ Lodging Trust (RLJ) cut its common stock dividend from $0.33 per share down to $0.01 per share. As soon as I saw they retained a common stock dividend, no matter how small, I went looking for the RLJ preferred stock. Since I added the stock in April 2020, my subscribers have done very well with the RLJ Preferred A shares and their 7.8% coupon rate.
Preferred stocks make fixed interest payments. The dividend rate is determined by the annual coupon rate and the par value, which is $25 per share for most preferred stock issues. Preferreds do not have a maturity date, but most are callable at some point in time. For example, New Residential Investments just issued their new Preferred D shares, which have a 7.0% coupon rate and are not callable until 2026.
Preferred shares trade on the stock exchanges, and share prices will fluctuate. You need to be most concerned about any preferred trading above $25 that is currently, or will soon be, callable.
Currently, there are 581 preferred stocks from which to choose. It takes some research to ferret out those with the most attractive investment potential. As an alternative, I provide my Dividend Hunter subscribers with a list of the top dozen preferred stocks to own. That group carries a current average yield of 7.25%. Not too shabby for very safe and stable dividend payments and share prices!