A Case for Preferred Stocks

We sold preferred stocks from the Retirement Watch portfolios last July. They’ve since declined a bit as interest rates rose. This article makes the case that preferreds are the only part of the markets potentially trading at a discount and in particular favors two preferred stock issues, both from banks. But the recommendation comes with a caveat or two.

The specific part of the market that I’m going to look at is the space of preferred stocks, a space riddled with inefficiencies.  There are two individual securities in that space that I consider to be attractive values: two large bank convertible preferred issues.  At current prices, they both yield around 6.15%.  They carry very little credit risk, they can’t be called in, and their dividends are tax-advantaged.  The fact that they could be priced so attractively in a market filled with so much mediocrity is proof that markets are not always efficient.

I should say at the outset that I don’t have a strong current view on the near-term direction of long-term interest rates.  My bias would be to bet against the consensus that they’re set to rise appreciably from here, but I can’t make that bet with much confidence.  If they do rise appreciably, the securities that I’m going to mention will likely underperform, along with pretty much everything else in the fixed income space.  So if that’s your base case, don’t interpret my sharing them as any kind of recommendation to buy.  Treat them instead as ideas to put on a fixed income shopping list, to consult when the time is right.