How to Find the Best Preferred Stocks

Dividend Investing, High-Yield Investing, Large Cap Stocks
Coins in jars with small plants growing out of them.

Dear Investor,

Because of their high level of dividend safety, I think individual preferred stocks should account for a portion of any investor’s high yield holdings.

I regularly look at different preferred stocks, looking for candidates that I can recommend to The Dividend Hunter members. I also monitor the current list of preferreds, making sure they still meet my criteria.

I thought you might find it interesting if I shared the criteria I use and the steps I take to find individual preferred stocks for The Dividend Hunter recommendations list.

Here it is…

Now, if you’re curious about what exactly preferred stocks are, stay tuned for Wednesday. I’ll send you a primer on preferreds then.

For now, suffice to say preferred stocks deserve a spot in every income investors portfolio.

This list of U.S. Preferred Stocks has been an invaluable resource to me in finding the best ones. It currently includes 571 issues that trade on the U.S. stock exchanges. As I work through the list, I look at several criteria:

  • Yield: My goal is to keep the average yield of the recommended preferred stocks list at about 7%. Nearly half of the 500-plus preferreds yield less than 5.5%.
  • Market cap: I limit my research to those preferred stocks with market caps of around $250 million or more. With approximately 20,000 Dividend Hunter subscribers, I cannot recommend an investment with a small market float.
  • Call date vs. current share price: Almost all preferred stocks become callable at par (usually $25 per share) at some point in time. A preferred stock with years to go before it can be called may be attractive even if it trades a few dollars above par. If a stock is currently or soon to be called, I want the trading price to be close to $25.00.

Winnowing through the list of preferred stocks using these criteria leaves few of the initial 571.

Once I find a preferred stock that looks attractive, I dig into its features and terms. Mostly I look for anything that makes the preferred unattractive as a longer-term investment. This part of the research can take hours of digging into different databases and scanning through the offering prospectus.

One example occurred a couple of weeks ago. I found a preferred stock from a very solid company that met all of my criteria. This preferred had a convertible feature, allowing the preferred shares to be converted into common shares.

But as I dug deeper, I learned a mandatory conversion into the non-dividend paying common shares would happen in just a month. So that one went into the digital trash can.

My Dividend Hunter subscribers have access to my full list of 11 preferred stocks worth buying now. They’re part of my 36 month accelerated income plan. Click here to learn more.

One final note: just because a preferred stock can be called in, doesn’t mean it will be. The sponsor company must come up with several hundred million in cash (unlikely) or be able to issue new debt or preferred shares at a much lower interest rate (also often unlikely) to make calling in a preferred share issue a viable business move.

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