These so-called 'hybrids' are too often ignored and considering their eye-popping yields, they shouldn't be. There is nothing better than the power of compounding especially with these kinds of dividends. Although preferred stocks typically yield higher dividends than the common stock, make sure you don't over-pay for them. DO YOUR ANALYSIS before you buy! Remember part of your gains in equities are based on buying BELOW par value.
After all, preferred stocks have many of the advantages of bonds in that they trade in very tight range, they pay a regular dividend, and they are higher up in the capital stack than equity. In addition, if a company is forced to reduce dividends, it must first kill the dividend to the common stock before the preferred stock.
Before the picks, a few educational notes: Preferred stocks you’ll want to avoid are those whose companies have already cut common dividends, indicating the company is struggling with its cash position and income generation. You’ll also want to avoid preferred stocks trading substantially above par, or the price they were originally offered at. Most preferred stocks are “callable,” which means the company can pay the issuing price for shares after a certain date. You don’t want to buy a preferred stock at $28 and have it called at $25. It’s OK to pay a slight premium, but not too much.
Now, onto those preferred stocks to buy:
#1. Preferred Stocks to Buy: Ashford Hospitality Trust (AHT) Series D 8.45% CumulativeDividend Yield: 8.45%
I love this hotel REIT and its stock for many reasons. Ashford Hospitality Trust is extremely well-managed, boasting management that has been in the hotel business for 24 years. Leadership has shown deftness and creativity with the company’s financing over the years.
I’ve owned these shares for quite some time, and I suggest owning them for the long term. Ashford’s D shares trade just slightly over their $25 issuing price and yield a very attractive 8.45%.
#2. Preferred Stocks to Buy: Public Storage Series TDividend Yield: 6.58%
I also like both Public Storage (PSA) and its Series T preferred stock. As a result of the financial crisis, many people lost their homes. What happens when people get evicted from a house? They downsize. That’s one reason we’ve seen apartment REIT stock prices appreciate, but that’s also why Public Storage has done so well.
Public Storage has 10 different series of preferred stock, but I like the Series T because it trades at $21.83, which is more than 12% below par. I don’t see any reason for this discount, and it also boosts the 5.75% dividend (at par) to 6.58% at the current price.
#3. Preferred Stocks to Buy: PowerShares Preferred Portfolio (PGX) Dividend Yield: 6.6%
Of course, if you’re worried about picking the right preferred stock, you can always go with an ETF, which offers diversification.
There are a few preferred ETFs floating around, but one I favor is the PowerShares Preferred Portfolio (PGX).