The preferred-stock market has suffered one of its worst selloffs in decades as yields on leading bank preferred issues have risen to about 6% from 4%. But with yields now at their highest levels in five years, the $350 billion market has gotten more attractive.
Some preferred issues have fallen nearly 30% in price this year—a huge decline for an asset class many investors have viewed as relatively low risk. The losses reflect the rise in long-term interest rates and a widening in yield spreads relative to Treasuries. Most preferreds are perpetual, which can make them acutely sensitive to rate changes. Many are down more than long-term Treasury bonds, including the iShares 20-Year Treasury Bond exchange-traded fund (ticker: TLT), which is off 22% in 2022.
Frank Sileo, a fixed-income strategist at
wrote recently that the market has a “more favorable outlook,” citing “improved valuation” and a better backdrop for Treasury yields after sharp rate increases this year.
“From a credit standpoint, the market is in very good shape,” says Eric Chadwick, president of Flaherty & Crumrine, a preferred-focused investment firm with $4.5 billion under management. He points out that banks dominate the market and that their “balance sheets are strong.”
The biggest losses have come in preferreds issued last year that had historically low dividend yields.
4.2% preferred issue (JPM Pr M), a $2 billion issue, has dropped almost 30% this year to $18, lifting its yield to 5.85%.
4.75% issue (WFC Pr Z) now trades at $19.50 for a 6.1% yield and
4.75% issue (T Pr C) is at $19.25, yielding 6.15%.
Vornado Realty Trust
4.45% issue (VNO Pr O) is at $17.50, yielding 6.35%.
The face value on these issues is $25 a share; they all traded around that level at year-end 2021.
Buying preferreds at discounts to their face value mitigates one of the problems with the market. Preferreds generally can be redeemed by issuers in five years, limiting their upside. But if an investor buys a preferred at a sharp discount, there is considerably more appreciation potential.
The largest ETF, the $16 billion iShares Preferred & Income Securities (PFF), is off 15% this year to $33.50 and yields 4.5%.
|Preferred Issue / Ticker||Recent Price||YTD Change||Yield|
|JPMorgan Chase 4.20% / JPM Pfd MM||$17.90||-29.9%||5.85%|
|Wells Fargo 4.75% / WFC Pfd Z||19.44||-24.8||6.11|
|AT&T 4.75% / T Pfd C||19.24||-26.7||6.16|
|Vornado Realty Trust 4.45% / VNO Pfd O||17.43||-29.4||6.36|
|Qurate Retail 8% due 2031 / QRTEP||79.35||-23.1||10.09|
|ETF / Ticker|
|iShares Preferred & Income Securities / PFF||$33.50||-15.0%||4.39%|
|Closed-End Fund / Ticker|
|Flaherty & Crumrine Preferred Securites / FFC||$18.12||-16.6%||7.88%|
|Nuveen Preferred Income Opportunities / JPC||7.87||-19.4||8.08|
Note: Preferreds have par value of $25 except for Qurate Retail, which has a par value of $100.
Closed-end funds yield more, reflecting the use of leverage. The Flaherty & Crumrine Preferred & Income Securities (FFC) and Nuveen Preferred & Income Opportunities funds (JPC) yield around 8%. The Nuveen fund trades at a 7% discount to net asset value; the Flaherty & Crumrine issue fetches a slight premium to NAV.
Preferred stock has long appealed to retail investors because of the relatively high and secure dividend yields. Preferreds with $25 face values are traded like stocks on exchanges, mostly on the NYSE, giving the market more transparency than corporate or municipal bonds. There are also preferreds with $1,000 face values geared toward institutional investors that generally aren’t exchange-traded.
Chadwick says these issues are often more appealing than $25 par preferreds. One recent issue, he says, is
Bank of America
$2 billion of preferred that carries a 6.125% rate for five years, then resets to float at a spread of 3.25% percentage points above the five-year Treasury. This issue has similar yields to fixed-rate preferreds but less rate risk due to the floating-rate feature.
Preferreds offer tax advantages. Dividends normally are taxed favorably like common-stock payouts since preferreds are a senior form of equity. While preferred stock is less secure than debt, companies are loath to omit preferred dividends in part because common dividends can’t be paid unless preferred payouts are being met.
Barron’s has written periodically on preferreds, cautiously in our 2022 income investing outlook, and favorably in a recent article on bond-market opportunities.
Write to Andrew Bary at [email protected]