26 BARRON’S October 19, 2020
stocks on the New York Stock Ex-
change and the Nasdaq market. Pre-
ferred dividends, like those on com-
mon shares, usually benefit from
preferential dividend tax treatment.
Preferred yields, while low, still
comfortably exceed the puny yields
on Treasuries. Reflecting the market’s
strength, the largest exchange-traded
fund for preferreds at $17 billion,
iShares Preferred & Income Secu-
rities(PFF), has rallied more than
50% from its March low, to $37. It
yields about 5%.
Modest net issuance has been met
with high investor demand. Since Sept.
1, about $5 billion of new preferred
and related securities have been is-
sued, but $4.25 billion has been re-
deemed.
“It’s a sellers’ market, and issuers are
taking advantage of it,” says Frank Si-
leo, a senior fixed-income strategist at
UBS. “Investors are hungry for yield.”
It has been the same situation for
much of the year. New preferred issu-
ance has totaled $47 billion in the first
nine months of 2020, but net new
issuance is only about $12 billion be-
cause of the redemption of high-rate
securities.
One sign of froth is thatPublic
Storage(PSA), the leading self-storage
real estate investment trust and a siz-
able preferred issuer, sold $250 million
of preferred at just 3.875% last month
in what could be the first sub-4%
fixed-rate issue. The yield was three-
quarters of a percentage point lower
than a deal in June from the company.
The 3.875% issue (PSA Pr N) now
trades close to its face value of $25.
Other recent issuers include insurer
W.R. Berkley(WRB), which issued
40-year exchange-traded subordinated
debt at 4.25% (WRB Pr G) and electric
utilityDTE Energy(DTE), which is-
sued 4.375% subordinated debt (DTB).
The subordinated debt deals trade like
preferred but pay interest, not divi-
dends, and thus lack tax benefits.
With the drop in rates, Nuveen’s
Baker says, there is more risk in pre-
ferred issues because they tend to be
perpetual securities, making their
prices acutely sensitive to higher
interest rates. Some investors have
pulled back from the market, viewing
the rate risk/reward as unappealing.
One negative with preferred stock is
that most issues are redeemable at face
value at the issuer’s option in five
years, limiting upside potential, while
the downside from higher rates and
credit problems is significant. If long-
term rates rise a percentage point,
some preferred could drop 10% or
more in price.
Preferred closed-end funds like the
Nuveen offering and theFirst Trust
Intermediate Duration Preferred
and Incomefund (FPF) invest beyond
preferred, in convertible securities and
debt and carry yields of around 7%,
reflecting leverage.
Baker likes a recent 5.7% preferred
issue from General Motors Financial,
the financing arm ofGeneral Motors
(GM). He cites GM’s strong balance
sheet and CEO Mary Barra’s “strategic
vision.” The GM Financial issue has 10
years of protection from early redemp-
tion, or a call, better than the typical
five years on bank deals. In 2030, the
GM Financial issue shifts to a floating
Prospecting
For Yield
In Preferreds
After a Rally
Attractive opportunities can still be
found among issuers like GE, Wells
Fargo, General Motors Financial,
and John Malone’s Qurate Retail
P
referred stocks have en-
joyed a strong rally since
the market lows in March,
reducing opportunities in
the $350 billion sector.
Most preferreds from the
leading issuers—the major
banks—now trade at premiums to
their face value, often resulting in
yields of 3% or less until the securities
are likely to be called for redemption in
the coming years.
With rates so low, investors have to
look further afield and take more risk
than they did in June, whenBarron’s
highlighted that many preferreds were
still yielding in the 5% range.
But investors can still find yields
of 4% to 8% on preferreds and related
securities. Issuers like General Motors
Financial,General Electric(ticker:
GE),Wells Fargo(WFC),Capital
One Financial(COF), and home-
shopping operatorQurate Retail
(QRTEA) offer opportunities.
“We think the market is still attrac-
tive,” says Douglas Baker, the head of
preferred investing at Nuveen, which
runs the $4 billionNuveen Preferred
Securities and Incomefund
(NPSAX) and several closed-end
funds, includingNuveen Preferred &
Income Securities(JPS).
Preferreds have long been popular
with retail investors because of their
relatively high yields, security (pre-
ferred is senior to common stock), and
liquidity. Many issues, especially those
with $25 face value, trade like common
By ANDREW BARY
Preferential Treatment
Here are five preferred issues and three funds that can help investors take advantage of the yields offered by
preferred stocks.
Issue / Symbol Recent Price Yield Credit Rating Moody’s / S&P
Capital One 4.625% / COF Pr K $24.64 4.7% Baa3 / BB
General Electric 5% debt 80.74 4.5 Baa3 / BBB-
General Motors Financial 5.7% 102.00 5.5 Ba2 / BB+
Qurate Retail 8% / QRTEP 99.19 8.1 Unrated
Wells Fargo 4.75% / WFC Pr Z 25.43 4.6 Baa2 / BB+
ETFs
Fund / Ticker Recent Price Yield Discount to Net Asset Value
iShares Preferred & Income Securities / PFF $36.90 5.1% NM
CLOSED-END FUNDS
Fund / Ticker Recent Price Yield Discount to Net Asset Value
Nuveen Preferred & Income Securities / JPS $9.00 6.7% 2.8%
First Trust Intermediate Duration 21.75 7.3 4.8
Preferred & Income / FPF
NM=Not Meaningful Source: Bloomberg Illustration by Bill Butcher