Berko: Picking preferred stocks
Friday, February 07, 2014 7:00 AM
Dear Mr. Berko:
I want to invest $51,000 in high-yield preferred stocks (I can afford some risks) and need to get as close to 11 percent as possible. A friend of mine recently invested $38,000 in preferred stocks and recommended his new broker. He’s very happy with his high-yield returns. The broker he referred me to recommended 18 preferred issues, giving names I’d never heard of – such as American Community Development Group, Terra Tech, Yukon Gold and ImmunoCellular Therapeutics – that yield between 14 and 22 percent. He advised me to invest about $5,000 in 10 issues (I’ve enclosed the names, including prices and yields) and told me to pick the ones I like best. I need your help in selecting the best from his list.
P.R., Ann Arbor, Mich.
I spent nine minutes perusing that list, and I can’t find enough information on any of them to support even a ridiculously rank speculative purchase. If I did recommend any of those beastly issues, I might be accused of financial terrorism. This broker’s style suggests that he sells a lot of this garbage to other good folks who are CD-starved. However, please note that he’s not recommending these issues. Rather, he’s telling you to pick the issues you like best. Very clever he is! Each of those issues is radioactive, probably trading flat or in the process of implosion, and the commissions exceed 10 percent.
It’s hard to believe that there are so many publicly traded junk-rated preferred issues (mortgage real estate investment trusts, exchange-traded debentures, mining companies, biotechs, master limited partnerships, property REITs, royalty trusts and just plain preferreds) with comic balance sheets and Rube Goldberg income statements that sport yields between 20 and 50 percent. It’s incredible that lots of this stuff, trading at less than half of its initial public offering price, was taken public by some of the big names on Wall Street. And I’m gabberflasted that major brokerages peddle trash that’s not worth a sick pig in a poke to risk-averse, income-needy retirees.
There are quite a few preferred issues yielding between 7 and 9 percent, and I’m familiar with dozens of preferreds with yields between 11 and 14 percent, though I wouldn’t recommend any of them. The following is a sampling of issues that yield better than 9 percent. Each is speculative, but each should maintain its dividend till maturity. I’d be comfortable with any of them, providing they are a minority position in your income portfolio.
Consider the 10 percent coupon of the Stock Yards Bank & Trust preferred stock (SYBTP-$10), which yields 10 percent and matures in December 2038. The common stock of this 110-year-old bank trades at $30.40 and earns $2 a share.
Then look at the 10.5 percent coupon of the Banco Santander SA preferred (SAN.PRE-$26.50), with a 9.82 percent yield. It matures in September but probably won’t be called until 2018. The common stock of this huge Spanish bank trades at $9.11 and earns 67 cents.
The 9.75 percent coupon of the Taylor Capital Group Inc. preferred (TAYCP-$26.35) yields 9.24 percent and matures in October 2032. The common stock of this $6 billion asset bank trades at $23.95 and earns $1.81.
Another is the 10 percent coupon of the PrivateBancorp Inc. preferred (PVTBP-$26.50), yielding 9.43 percent and maturing in June 2028. The common stock of this $510 million-revenue Chicago bank trades at $30.23.
Those preferreds and others are located on www.preferredstockchannel.com, a site that details a list of 500 preferred issues, most of which are junk but many of which have some redeeming value. The site has a good preferred stock screener and lists the common and preferred stock symbols, the maturity and call dates, current prices of the common stock and the underlying preferred, and a brief business description of each company. But beware of the ridiculous advertising come-ons.
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