Preferred Stocks for Retirees to Consider

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We constantly monitor investor discussion on message boards about which preferred stocks people are interested in purchasing and, in particular, we like to observe comments about new issues that are brought to market.

These boards are dominated by investors in my age bracket (65 years old) and many of them are fully retired. They depend upon receiving income contributions from their investment accounts to maintain their standard of living.

Most message boards we observe are civil in conversation. But on occasion participants will chide someone over a purchase because they personally wouldn’t buy the issue. I always think to myself “what does he/she know about the other investor in the message exchange”? The answer is likely nothing at all.

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We have written about income investors having goals of some sort in their investing.  These goals may be a percentage return desired or they may be expressed in a monthly dollar amount of income needed in retirement to support their lifestyle. But a goal of some sort needs to be defined. Investing willy-nilly without a goal is like sailing a ship without a rudder.

Personally, we have set a goal of a 7% annual return for our investments. However, in reality, we would be quite happy to attain a 6% annual return. Being conservative in our investing style, we realize that trying to stretch for returns of 8, 9 or 10% annually would require us to undertake risk that we are unwilling to absorb. While the 7% goal is somewhat arbitrary, it would provide the amount of income we believe would allow us to maintain our current lifestyle in retirement, although we are not yet retired.

While our annual goal is 7%, we realize that every investor has a different need and a different comfort level with particular investments. Maybe one needs 2% returns per year, while another maybe needs 5%, while a third seeks 10%. Each one of these needs pushes one to invest accordingly.

Recently we observed a discussion of the new preferred stock issued by giant self-storage real estate investment trust (REIT) Public Storage (NYSE:PSA). This new issue (details of which can be seen here) was priced with a coupon of 5.60%. While meager, that coupon, compared to many REIT preferred stocks, reflects the extremely high quality of the issuer. The issue is rated BBB+ by Standard and Poor’s and A3 by Moody’s. A number of posters to a particular message board chimed in to express they would be buying shares in this new issue. This brought responses from others asking why they would consider this low coupon when they could “easily” purchase any number of other issues with 6%, 6.5% or 7% coupons. The response from the buyers was simple — it meets their needs and it is very high quality – allowing them to sleep well at night.

In contrast to the above, there recently was a new issue sold by mortgage REIT Cherry Hill Mortgage (NYSE:CHMI) which has a 8.25% coupon (details of the issue can be seen here).  This new issue has a fixed-to-floating rate coupon, which means in five years the coupon will no longer be 8.25%, but instead will be set at three-month Libor (the London Interbank Offering Rate), plus a “spread” of 5.631%, which is reset quarterly.

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It is obvious from the initial 8.25% coupon that this issue has substantially more risk than the 5.60% issue sold by Public Storage, but we followed discussions of many investors looking to buy the issue immediately upon issuance. Others chimed in with the familiar (and predictable) refrain of “too much risk for me.”

When it comes to preferred stocks, there is something available for everyone. Whether you are ultra conservative, or more aggressive, you can find an investment to fit your needs. We maintain a listing of all preferred stocks available to investors. The listing, sorted from highest current yield to lowest current yield, can be found here. It is a reasonable assumption that those with the highest current yield are the issues with the highest risk.

Of course, when it comes to preferred stocks, there are other factors to consider before purchase, such as whether the dividends are cumulative or non-cumulative and whether the dividends are qualified for preferential tax treatment. But those topics deserve an article purely devoted to those topics.

In summary, there is no right or wrong answer as to which is the best preferred stock. There is only a best preferred stock for you. Each individual investor must determine his or her goals and then, with significant research and due diligence, purchase the best preferred stock to help meet those goals. Ideas may be found by watching message boards, but the final decision and responsibility must be made by the individual investor.

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