Six Preferred Stocks to Buy and Hold Forever

Six Preferred Stocks to Buy and Hold Forever

How does a steady flow of income from 24 dividend payments a year for an average yield of 7.23% sound?

If you love getting dividends – and, more importantly, big and safe dividends – every year, then you need to consider forever preferred stocks. These are investments we believe you can buy and hold forever.

In this report, we’ll uncover our six favorite preferred stocks that have been hand-selected from our income system.

This income system is designed for wealth seekers. It uses the immense power of dividend reinvestment plans to compound dividends and grow wealth in a conservative manner.

But before listing the preferred shares, let’s review the power of compounding…

If you buy 1,000 shares of a $10 stock and receive a 4% yield, you’ll receive $400 a year. That money can then be put back to work.

Reinvesting the dividends puts an extra 40 shares in your portfolio the second year. And at a 4% yield, your annual dividend will climb to $416. Now, an extra $16 isn’t much. But over time, reinvesting compounds your wealth.

For example, in year 10, your yield on initial investment will climb to 5.7%. In year 20, it will reach 8.4% and your annual dividend will rise to $843. Reinvesting over time is definitely worth the wait.

The easiest way to reinvest your dividends is to simply tell your broker that’s what you want to do. Most brokers offer this service free of charge. So you can buy a stock once, pay one commission and hold it for years without paying another dime as the nest egg grows.

One thing to remember: If the stocks are in a taxable account, you’ll owe taxes on the dividends even if you’re reinvesting them and not collecting the cash. So be sure to have enough cash set aside to pay the government every year.

Now that we’ve covered the power of compounding and taxes, let’s get to the preferred shares…

Safer Than Normal Stocks

Owning preferred stock, or preferred shares, puts you ahead of normal shareholders. You have a higher claim on both the company’s dividends and assets: You’re first in line at the drinking fountain.

(There is one downside: Preferred shareholders usually don’t have voting rights. Then again, those don’t mean much to the average investor anyway. For example, if you put $100 million in Microsoft, you’d still have less than 0.03% of the vote.)

Preferred shares also combine features of debt. A fixed dividend is paid, but the stock’s price can appreciate. And there are other aspects to consider.

These include a callable feature, which allows the issuer to buy back shares, often at par value after a set date. Many preferred shares include an optional call date but usually aren’t called early.

 

A second common feature is convertibility. These shares can be exchanged for a set number of common shares under certain circumstances. But similar to the call feature, this doesn’t normally happen.

However, the best part of preferred shares is the higher payouts.

Most pay a much bigger dividend. Why?

As I mentioned above, preferred shares are a hybrid equity and debt instrument. Companies issue preferred shares to raise money for projects, research and development, acquisitions, etc.

In an effort to entice investors to buy them up, companies will offer a higher yield. It’s the best way to attract money. And it works.

So now that you understand the ins and outs, it’s time to jump in. The right set of preferred shares is a great way to lock in a steady dividend.

Six Forever Preferred Stocks

Different brokers list the same preferred shares under different ticker symbols. It’s a bit confusing, but with the title of each preferred stock below, you can talk to your broker to find the matching securities.

Forever Preferred Stock #1: National General Holdings Corp. 7.5% Depositary Shares, Non-Cumulative Preferred Series B

Yield: 7.5%

National General Holdings insures 3.9 million policyholders and is one of the top 20 underwriters of auto insurance in the U.S. Established in 1939, it has more than 8,400 employees and 81,170 independent insurance agents and brokers who sell its policies. The company is growing both its top and bottom lines, with revenue and income climbing over the last few years. In 2018, revenue was $4.6 billion – up more than 6% from the previous year. And net income was $198 million. As National General continues to grow its sales and earnings, cash flow should follow suit. This will keep preferred shareholders happy with a plump and sustainable 7.5% yield.

Forever Preferred Stock #2: Capital One Financial 5.0% Perpetual Preferred, Series I

Yield: 5.1%

You may have one of its credit cards in your wallet and you’ve probably seen its commercials. Its “What’s in your wallet?” campaign has made Capital One Financial one of the most recognizable issuers of credit cards in the U.S.

But you may not know that Capital One Financial is one of the largest banks in the U.S. based on deposits. The financial services company operates under three segments: credit cards, consumer lending and commercial banking.

Capital One Financial is reinventing banking by opening Capital One Cafés across the country. It’s also building a technology company that does banking.

The company’s business is strong, and its model is thriving. In 2018, Capital One Financial generated a whopping $6 billion of net income and $11.82 of earnings per share on a record $28 billion of revenue.

With record sales and earnings predicted to continue, Capital One Financial should have no trouble putting big dividends in preferred shareholders’ wallets for years to come.

Forever Preferred Stock #3: Compass Diversified Holdings 7.25% Perpetual Preferred, Series A

Yield: 7.8%

Private equity investments aren’t just for rich folks anymore.

Today, nearly anyone can buy shares of publicly traded private equity firm Compass Diversified Holdings. The company buys, operates and sells middle-market businesses.

It owns eight consumer products and industrial businesses, such as Ergobaby and Foam Fabricators. Compass Diversified Holdings makes money off of the interest payments on loans it extends to these companies and the profits it receives upon a sale.

Net income and free cash flow are climbing. In 2019, the company is expected to generate $173 million of net income and $129 million of free cash flow. Those are higher than the negative $21 million and $64 million Compass Diversified Holdings generated in 2018.

Compass Diversified Holdings has plenty of cash to fund its preferred stock’s generous dividend.

Forever Preferred Stock #4: Ashford Hospitality Trust 7.5% Perpetual Preferred, Series I

Yield: 8.9%

You’ve probably never heard of Ashford Hospitality Trust, but you may have stayed in one of its 85 luxury hotel properties. Ashford Hospitality Trust is a real estate investment trust (REIT) that invests in hotels. Its properties operate under the Embassy Suites, Hilton, Marriott, Hyatt, Starwood and InterContinental Hotels Group brands, and represent 17,200 rooms.

About 80% of its revenue comes from its rooms, while 15% comes from its food and beverage services.

More Americans are traveling, which means Ashford Hospitality Trust’s revenue is rising. In 2019, revenue is expected to increase 4.9%, from $1.4 billion to $1.5 billion. But more importantly, funds from operations (FFO), the equivalent of cash flow for a REIT, is really taking off! FFO is expected to grow 55%, from $0.71 per share in 2018 to $1.11 per share in 2019.

Growing revenue and FFO help protect the staying power of Ashford Hospitality Trust’s juicy 8.9% preferred yield.

Forever Preferred Stock #5: Energy Transfer Operating LP 7.625% Preferred Shares, Series D

Yield: 7.7%

Energy Transfer Operating LP is one of the largest and most diversified midstream energy companies in the U.S. It has more than 86,000 miles of pipeline transporting oil and gas products through 38 states.

It makes money by charging its customers for using its network of pipelines and storage tanks. It makes money off of the volume of oil and gas transported and stored in its network so it’s more insulated than other energy companies from the ups and downs of commodity prices.

Better still, Energy Transfer Operating LP has minimum volume requirements in its contracts. That means it’ll receive a minimum fee from each customer even if volumes fall, giving it more predictable cash flow than most other energy companies. Its cash flows are rising. Cash available for distribution increased roughly 30% recently, from $4.1 billion in 2017 to $5.3 billion in 2018, leaving it with plenty of money to fund the dividend on its preferred shares.

Forever Preferred Stock #6: Hersha Hospitality Trust 6.50% Perpetual Preferred Shares, Series E

Yield: 6.4%

Our next pick is another hotel REIT. Hersha Hospitality Trust owns 48 upscale hotels in Boston, New York, Philadelphia, Washington, D.C., South Florida, and select markets on the West Coast.

The company’s revenue is expected to grow 8.4% in 2019, from $495.1 million in 2018 to $536.6 million. FFO should follow suit as the company acquires new properties and gains market share in its current locations, ensuring that Hersha Hospitality Trust will be able to fund the dividend today as well as in the years to come.

The Cure for Stock Market Volatility

We believe that forever preferred stocks are the cure for stock market fears and volatility. While the rest of investors bite their nails worrying what the market will do days, weeks or months from now, you can sit back and collect your dividends with little to worry about except what you’re going to do with all this income (a problem anyone would like to have).

The six preferred stocks mentioned above have an average yield of 7.23%. And as we mentioned before, the power of reinvested income and compounded dividends will boost your annual dividend yield even higher.

Remember: These aren’t short-term picks. They’re long-term holds. And all of them should be able to maintain high dividend payments over the long haul.

Good investing,

The Wealthy Retirement Research Team

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Chief Income Strategist, The Oxford Club