Published on July 10th, 2023 by Nikolaos Sismanis
The past few months have been somewhat pleasant for most investors, with major indexes posting double-digit gains. However, nothing has really changed when it comes to the ongoing macroeconomic turmoil and overall uncertainty that has persisted as a result of rising interest rates. Hence, an increasing number of investors have been looking for safer risk-adjusted returns, primarily in the form of dividend income.
Dividends can enhance the predictability of investors’ total return potential. This is why we often steer investors toward the Dividend Aristocrats.
The Dividend Aristocrats are a select group of 67 S&P 500 stocks with 25+ years of consecutive dividend increases. They are the ‘best of the best’ dividend growth stocks.
There are currently 67 Dividend Aristocrats. You can download an Excel spreadsheet of all 67 (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:
We here at Sure Dividend are constantly striving to identify the most promising dividend-paying equities that have the potential to deliver the highest annualized total return potential.
However, this search has become increasingly difficult during the ongoing trading environment. With relatively high inflation levels and high-interest rates, investors have been looking for above-average yields. This is because when interest rates increase, the equity cost also rises. In other words, investors require a greater return to compensate for the increased risk compared to the risk-free rate.
Yet, the S&P 500’s dividend yield has barely breached 1.5%. And, although there are equities with exceptionally high yields in the present market conditions, they often belong to sectors that are highly susceptible to rising interest rates, such as REITs. Consequently, even these stocks may not be the most appealing option since their elevated yields come with heightened risk.
As a result, income-oriented investors have a hard time finding income-producing securities with relatively reduced risk and volatility. Thankfully, another equities category has historically been an excellent source of stable high-yield income streams, often featuring a more balanced risk/reward investment case. These are none other than preferred stocks.
What Is Preferred Stock?
A preferred stock is a special type of stock that pays a set schedule of dividends, which are predetermined. Unless otherwise specified, it has no claim to the company’s overall net income, as is the case with common stocks.
Preferred stocks often resemble a bond, as the dividends the company pays out are almost like the coupon payments it would pay as interest on a bond. A company is not allowed to issue dividend payments on its common stock unless it has already settled its preferred stock dividends. Most of the time, preferred stocks are cumulative. This means that if a company struggles for a while and has suspended its common stock dividends while also failing to meet its preferred stock obligations, upon recovery, it first has to settle all accrued dividends on its preferreds before resuming its common stock dividends.
Consequently, preferred stocks offer higher dividend priority than common stock, adding extra layers of assurance that investors will keep receiving their dividends. Additionally, since their returns are almost entirely predetermined, they trade more like bonds, and their price is generally uncorrelated with that of the common stock. Hence, the feature considerably lower volatility levels in times of uncertainty.
In exchange for shielding themselves into the safety of preferreds, however, preferred stockholders have no claim to any potential additional rewards, no matter how well the company is doing. Overall, preferreds offer a more balanced risk/reward type of investment, which, more often than not, is able to meet investors’ income-producing needs adequately.
It’s important to note, however, that preferred stock dividends are not guaranteed. A company’s bonds will always rank higher in the event of a hypothetical bankruptcy. Therefore investors still face some levels of risk, which greatly varies from company to company. Some preferreds are perpetual, while others are not. Some have fixed rates, while others have variable rates, and some are even convertible. Hence, each case is unique. We will be explaining those in detail whenever relevant.
Preferred Stock Glossary
For your own convince on the rest of this report, we have listed the following preferred-stock-related terms and their corresponding meaning:
- Par Value: The par value of a preferred stock is the amount upon which the associated dividend is calculated. For instance, if the par value of the stock is $100 and the coupon/dividend is 5%, then the issuing entity must pay $5 per year for as long as the preferred stock is outstanding (usually on a quarterly or monthly basis).
- Call date: The call date is a day on which the issuer has the right to redeem a callable preferred at par, or at a small premium to par, prior to the stated maturity date.
- Redemption date: The redemption date is the date the issuer is obligated to redeem the preferred at par, and all of its accrued unpaid dividends. Most preferred stocks are irredeemable, remaining active for long as the issuer sees fit. In other words, they are perpetual.
- Yield to call: The Yield to call (YTC) refers to the return a preferred stockholder receives if the preferred stock is held until the call date, which occurs sometime before it reaches maturity.
- Yield to redemption: The same as YTC, but for the redemption, if stated.
6 AAA Preferred Stocks To Buy Now and 1 to avoid
Below, we have listed 5 of the best preferred stocks we believe are currently available. By “best,” we define our views on how attractive each preferred stock’s risk/reward ratio is, albeit a subjective assessment, but based on objective data. Additionally, we have included a preferred stock that is better to be avoided. The list’s order is random and does not assume a particular sorting factor.
#1: Safe Bulkers Inc. Series-D (SB.PD)
Safe Bulkers is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly coal, grain, and iron ore, along international shipping routes for some of the globe’s most prominent suppliers of marine dry bulk transportation services. As of its latest filings, it operated a fleet of 44 dry bulk carriers featuring an average age of 10.7 years and a total loading capacity of 4.5 million deadweight tons. Safe Bulkers was incorporated in 2007, and its shares are registered in Monaco.
Preferred stock analysis
Safe Bulkers, along with many of its shipping peers, especially those in the dry bulk space, suffered from depressed chartering rates over the decade leading to the COVID-19 pandemic. The market landscape transformed during 2020-2021. Dry bulk rates skyrocketed at the time as increased logistics bottlenecks led to a shortage of available vessels. Rates have normalized since, but Safe Bulkers, along with other companies in the space, improved the balance sheets considerably by the euphoria that persisted a couple of years ago.
Moreover, the industry is currently enjoying the best supply-side dynamics in over 30 years, with the global order book standing in the single-percentage digits of the world’s total dry bulk fleet. Basically, with older vessels being continuously scrapped every year and only a limited number of new vessels coming online moving forward, dry bulk rates could surge further. The ongoing (and unfortunate) invasion of Ukraine and China’s construction industry potentially rebounding could be two positive catalysts for the company as they could drive commodity prices higher. This is because when the cargo that is carried is more valuable, dry bulk carriers have increased pricing leverage.
Last year, the company made a near-record net income of $172.6 million as a result of the favorable trading environment. Despite dry bulk rates having corrected from their previous highs, they still remain in line with their historical average. Thus, this year’s profitability may be softer, but hopefully, the company won’t lose money. Despite rates weakening lately, the company has also maintained its common quarterly dividend of $0.05, which currently translates to a 6.2% dividend yield.
Note that the company has two series of preferred shares. Series C and Series D. Amid enjoying record profits, Safe Bulkers has initiated the redemption of its Series C Preferred Shares in order to get rid of its expensive financing instruments. So far, around 65% of the outstanding Series C Preferred Shares have been bought back. However, Series D will most likely stay on the market. Not only would that require an additional $80 million to buy back, which the company will likely want to use to expand its fleet, but it also makes for a useful instrument in case the company needs financing during a tougher trading period, whenever that might be.
With shares trading more or less near par value, current investors don’t risk losing money by a potential redemption anyway. In the meantime, the dividend remains extremely covered. Thus, Series D should make for a very safe 8.0%. The company continued to faithfully pay its preferred dividends even during the toughest times of the shipping cycles, as their aggregate payable dividends represent a tiny amount of the company’s operating cash flows. The only reason we have assigned a B rating to the stock is due to its relatively limited liquidity. On average, around two thousand shares exchange hands daily, representing around $50K worth of stock. Still, retail investors should not have a notable issue with buying and selling reasonable quantities, even if their order takes a couple of hours to be executed.
#2: Gabelli Utility Trust Series-C (GUT.PC)
The Gabelli Utility Trust is a closed-ended equity mutual fund managed by Gabelli Funds, LLC. The fund invests in stocks of companies providing products, services, or equipment for the generation or distribution of electricity, gas, water, telecommunications services, and infrastructure operations.
Preferred stock analysis
The safest preferred stock of all…
This closed-end fund managed by the iconic investor Mario Gabelli’s outfit offers some of the safest out there that pay qualified dividends. Because the fund is focused on the predictable and low-volatility utility sector, it enjoys another layer of safety. The fund used to have two publicly-traded preferred series outstanding; series A and series C. Only Series C remains active at the moment, which has an A1 rating from Moody’s as well. We have assigned a B score due to the below-average yield in the current market environment, nonetheless.
Because CEFs have limited leverage allowances, the company can never over-borrow and fail to meet its preferred stock obligations. Combined with the additional safety of the space it invests, as well as ample coverage, it’s virtually impossible for GUT-C’s dividend to face any issues whatsoever. For this reason, this is the only company whose preferreds have been assigned an A1 rating, ever. Hence, amid creditors’ low demands, the company was able to issue its preferreds at a much lower rate than that we saw on Safe Bulkers, this time at 5.38%.
Investors see GUT-C’s as an incredibly safe place to park their cash. Investors were also willing, in the past, to pay a premium despite the already humble initial yield. However, with interest rates on the rise, GUT-C now trades in-line or slightly below its par, as the yield is very humble in the first place. We believe this preferred makes for an excellent, T-bill-like investment in terms of safety. That said, you may want to look into higher-yielding preferreds given that GUT-C’s 5.5% current yield may not be enough to compensate investors in the current market landscape.
… but what if shares rally to a premium above par in the near future?…
Why would investors buy into the preferreds with the potential to lose money on their investment? Simple, the market bets that the company will not call its preferreds. The company can take advantage of this premium to issue additional preferred shares at the open market (ATM) – hence at a cheaper cost of “debt” equal to its current dividend yield. In other words, keeping the preferreds uncalled, in this case, opens a cheap borrowing vehicle for the company, which it can redeem at any point, in any case after the call date. Simultaneously, it somewhat makes sense for investors to buy the preferred at a premium. Why? Because after a few quarters (depending on the premium), the dividend payments will eventually accumulate, becoming larger than the current premium, offering investors positive returns, despite the negative yield to call. However, this could only be worth doing in a low-rates environment, as one can find higher yields these days with no significant additional risk.
#3: Costamare Inc. – Series B (CMRE.PB)
Costamare owns and operates containerships, which it leases to liner companies all over the world. As of its latest filings, the company had a fleet of 71 containerships with a total capacity of approximately 524,000 twenty-foot equivalent units. The company also owns 43 dry bulk vessels with a total capacity of approximately 2,369,000 deadweight tons.
Preferred stock analysis
Costamare is one of the highest-quality companies in the shipping industry. Nearly 60% of the company’s shares are owned by insiders (the sponsor family), who have reinvested $145 million back into the company through its DRIP program. As we mentioned in our earlier discussion on Safe Bulkers, the dry bulk industry benefited significantly during the pandemic. This applied to Costamare’s dry bulk fleet as well. However, most of the company’s cash flows are generated by its containerships. Even though dry bulk rates have now eased, resulting in the company’s dry bulk fleet recording reduced earnings entering 2023, its containership fleet remains employed at sky-high, multi-year rates that were signed during the pandemic, bringing massive profits.
Costamare has four preferred share classes outstanding. These are Series B, C, D, and E. They are mostly similar but differ in their call dates and original yields. The reason that we have selected Series B, in this case, is that while all the others have a higher original yield, they trade at a slight premium. Series B does not, really. In the ongoing environment in which shipping companies redeem their preferreds due to their expensive financing rates from the past, buying one of the other preferreds comes with a bit of a risk. If Costamare chooses to redeem, say, Series D the next day after you buy it, you risk losing ~1.6% of your principal amid the current equally high premium. This is not going to be the case with Series B, while its ~7.9% should still serve conservative, income-oriented investors quite sufficiently. If anything, a potential redemption would result in price gains as well, given the B class is trading below its par.
#4: Gladstone Commercial Corporation – Series E (GOODN)
Gladstone Commercial Corporation is a real estate investment trust, or REIT, that specializes in single-tenant and anchored multi-tenant net-leased industrial and office properties across the U.S. The trust targets primary and secondary markets that possess favorable economic growth trends, growing populations, strong employment, and robust growth trends. The trust’s goal is to pay shareholders monthly distributions, which it has done for over 18 consecutive years. Gladstone owns over 100 properties in 24 states that are leased to about 100 unique tenants and has a market capitalization of $520 million.
Preferred stock analysis
On the one hand, Gladstone Commercial’s performance has been quite stable over the years, with the company generating FFO/share between $1.50 and $1.60 for most of the past decade. On the other hand, the trust continues to issue new shares and debt to fund acquisitions, but those acquisitions fail to provide an economic gain. Thus, earnings have failed to grow. In other words, while the trust’s new properties provide growth on a dollar basis when the cost of those acquisitions is factored in, it is essentially no gain on a per-share basis. We don’t have any reason to believe this will change moving forward as the company’s common shares are quite expensive to issue, yielding 7% to 9% at most times. Its preferred stock and debt are not significantly cheaper, either.
With the company’s FFO/share failing to grow, the common dividend could be easily jeopardized amid even a temporary decline in earnings, as it is barely covered. However, the case for preferred investors is different, with preferred dividends being around 490% covered by the company’s operating cash flows. Still, this is a notably lower coverage than the previously preferred shares we discussed.
However, GOODN has two very attractive characteristics:
- Dividends are paid out on a monthly basis. This is quite important since investors enjoy increased cash flow visibility and can also reinvest dividends in advance or at a faster pace in any case.
- Shares are currently trading at a notable discount to par value. Despite the current 9.0% yield, assuming that an investor was to buy today and hold until a potential redemption, they would record additional share price gains.
#5: Global Net Lease – Series A (GNL.PA)
Global Net Lease is a publicly traded REIT listed on the NYSE focused on acquiring a diversified global portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenants, mission critical income producing net-leased assets across the United States, Western, and Northern Europe. The company owns more than 300 properties, enjoying an ample occupancy of 98.0%, with a weighted average remaining lease term of 7.8 years.
Preferred stock analysis
A resilient preferred stock, backed by real assets…
Real estate investment trusts have been one of the most reliable and trustworthy strategies to generate a long-term and growing income. You can see our complete REIT list here.
Preferred shares on the other hand, have been one of the best and more stable ways to generate fixed income. Combining the two, i.e., the preferred shares of a REIT, makes for a fantastic combo in terms of dividend safety.
REITs are obliged to distribute at least 90% of their taxable income. This ensures that all dividends on the preferred share must always be settled. Since Global Net Lease generates its income from real assets preferred investors enjoy an additional margin of safety. Additionally, since the company is funded mostly by common stock and debt (as is the case with most REITs), its preferred shares only make up a fraction of its balance sheet. Its series has a redemption value of just around $100 million.
As a result, the company needs to allocate only a small portion of its cash flows to settle its preferred dividends, hence the significant coverage. In that regard, GNL’s preferred shares are among the safest in the market to generate a stable income.
…now with the potential for further returns…
In our initial article, we had warned that despite Global Net Lease’s preferreds being worthwhile, investors should be wary of the premium to par at the time. The situation has now been reversed, with Series A, in this case, trading at a significant discount to par. We believe this is due to three reasons.
First, the common stock’s underwhelming performance and risky balance sheet scare investors despite the preferred stock’s heightened security. Second, investors recognize that the company will virtually never have the cash to redeem its preferreds, nor does its balance sheet is in a good enough position to be refinanced at a lower rate. However, this provides an advantage for current investors, as one can grab a relatively safe 9.2% yield, with the possibility for further upside if the company’s overall condition improves. Third, investors require a higher yield to be compensated now that rates haven risen significantly.
Overall, GNL.PA is a very low-risk investment since the common dividend would first need to be cut before suspending the preferred dividend. And even then, that would mean even more cash available for distribution for the preferred holders, further improving the payout ratio. Thus GNL.PA could greatly fit investors looking to generate a very resilient income in the high single-digits.
#6: EPR Properties (EPR)– Series E (EPR.PE)
EPR Properties is a specialty real estate investment trust, or REIT, that invests in properties in specific market segments that require industry knowledge to operate effectively. It selects properties it believes to have strong return potential in Entertainment, Recreation, and Education.
The REIT structures its investments as triple net, a structure that places the operating costs of the property on the tenants, not the REIT. The portfolio includes almost $7 billion in investments across 300+ locations in 44 states, including over 250 tenants. Total revenue should be around $600 million this year, and the stock is valued at $3.2 billion.
Preferred stock analysis
EPR’s portfolio has significant exposure to experiential parts of the economy, with its properties including movie theaters, attractions, experiencing lodgings, and eat & play centers, amongst other categories. As a result, the company was adversely impacted by COVID-19, leading to a substantial decline in rental revenues and a dividend cut in the midst of the pandemic.
EPR has now resumed its monthly dividend, which was even increased from $0.25 to a rate of $0.275 recently. Still, both the monthly dividend and the company’s stock price remain notably lower than their pre-pandemic level. We expect EPR’s performance to improve going forward, though we remain cautious of its future prospects.
The company has four Series of preferred stock outstanding. Series C, E, and G. While Series C and G trade at a discount to their par value, Series E comes with a great premium.
Why is that?
- Series C and G feature original dividend rates of 5.75% and 6.63% at par. The current discount makes sense because investors require a higher yield.
- Series E features a massive original dividend rate of 9%. The company was in a relatively worse financial position when it issued these shares, thus the high original dividend rate. Investors have been willing to pay a premium for the stock, as the yield still remains quite substantial. For instance, despite the current premium of 110%, the dividend yield remains at 8.2%.
However, there is an even more important reason:
Shares are not redeemable. In other words, EPR Properties cannot buy back this Series of preferred stock. Thus investors risk no losses from a sudden redemption. Instead, investors have the option to convert the Series E preferred shares into EPR’s common shares subject to certain conditions. The conversion rate will initially be 0.4512 common shares per $25.00 liquidation preference, which is analogous to an initial conversion price of around $55.41 per common share.
We don’t like this arrangement for several reasons:
- First, while the conversion arrangement may imply further upside, assuming that common shares trade notably beyond $55.41, we don’t believe EPR’s common stock will reach these levels for quite some time in its existing state.
- Second, if the common stock price were to surpass the initial conversion price ($55.41) by 150% for 20 out of any 30 successive trading says, EPR has the right to force conversion of the Series E preferred shares into common stock. The common stock was only a few dollars away from satisfying the forced conversion condition during much of 2019. Thus, Series E investors don’t have unlimited upside just because of their conversion right.
- Finally, as investors speculate about whether they will be able to convert Series E for further upside creates volatility and additional uncertainty, which has been reflected in Series E’s price movement occasionally. Volatility and uncertainty are the last attributes we want when it comes to investing in preferred shares during the current market environment. Accordingly, we suggest that investors avoid this one.
In the current trading environment, which is characterized by elevated inflation levels (despite inflation easing lately), macroeconomic headwinds (especially rising rates), and geopolitical turmoil, investors are struggling to find substantial and relatively safe yields.
With most high-yielding equities likely subject to several risks these days, we believe that the safest place for inflation-matching (and exceeding) yields can be found amongst various preferred equities. In fact, many of our suggested preferred stocks feature even wider coverage than a couple of years ago amid delivering record results and experiencing unprecedented industry tailwinds (e.g., the preferreds of shipping companies).
Accordingly, we believe these equities are now offering one of the best ways left to generate considerable income levels while undertaking limited risks compared to common stockholders.
Other Dividend Lists
The Dividend Aristocrats list is not the only way to quickly screen for stocks that regularly pay rising dividends:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 50 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.