Looking for the consistency of fixed yield, plus the potential for upside? Preferred stocks may be right for your portfolio. There are many approaches you can take with this asset class, but one you should consider is buying preferred stocks trading at a discount.
With the sharp rise of interest rates so far this year, many preferred shares have fallen to discount to their respective par value. That’s bad news for those who got in at par value (typically $25 per share). Yet for investors buying them today, at between $20 and $25 per share? They could provide solid returns. Both in terms of yield, as well as upside.
Like with common stock, there’s no guarantee preferred stocks will go up. In fact, like common shares, preferred stocks can be volatile, if the underlying company is facing issues. However, if you stick to large, more stable names, you may be able to mitigate much of this risk.
So, which preferred stocks trading at a discount should you consider right now? These seven, issued by large companies across many sectors, look appealing today.
Allstate Corporation 4.75% Noncumulative Preferred Stock Series I (ALL.PI)
Issued by property and casualty insurer Allstate (NYSE:ALL), Allstate Corporation 4.75% Noncumulative Preferred Stock Series I (NYSE:ALL.PI) has gone from trading at a premium, to trading at a discount, since January. Chalk this up to the Federal Reserve’s hiking of interest rates to combat inflation.
At today’s prices, ALL.PI stock trades at around a 10.5% discount. It offers a forward yield of 5.31%. Per the terms detailed in its prospectus, Series I shares are redeemable after Jan. 15, 2025. That’s not to say they will be redeemed on or after that date.
Given their sub-5% coupon, if rates keep climbing, Allstate would have little reason to buy back all outstanding Series I shares. Also, issuers of noncumulative preferred can skip dividends without having to pay them later on. Still, considering Allstate’s A+ credit rating, there’s not a high risk of this happening.
Bank of America 4.335% Noncumulative Preferred Stock Series NN (BAC.PO)
Bank of America 4.335% Noncumulative Preferred Stock Series NN (NYSE:BAC.PO) is another situation with a moderately high yield, plus a moderately high discount. Issued by Bank of America (NYSE:BAC), this preferred stock yields 5.58% at current prices.
At just under $19.50 per share, BAC.PO stock trades at around a 22.3% discount to par value. The optional redemption date for it occurs on Nov. 3, 2025. With rates rising, it’s questionable whether its issuer will want to redeem shares.
Also, if rates keep on climbing, presumably BAC.PO will continue to slide. Even so, it’s not set in stone that interest rates will continuously rise over the next few years. If a much feared recession happens in the next year or so, the Federal Reserve could end up lowering rates once again. That may result in pushing back up the value of this preferred stock.
Brookfield Infrastructure Partners 5.125% Class A Preferred Limited Partnership Units (BIP.PA)
Brookfield Infrastructure Partners (NYSE:BIP) is a master limited partnership that, as its name suggests, owns infrastructure assets. Regular BIP shares yield 3.69% at current prices. If yield rather than capital growth is your sole focus, you may want to consider the Brookfield Infrastructure Partners 5.125% Class A Preferred Limited Partnership Units (NYSE:BIP.PA).
Right now, BIP.PA stock trades at a nearly 25% discount to par value. It has a forward yield of 6.78%. If you think that fears of runaway interest rates are overblown, this may be an appealing preferred stock to buy. There’s a chance Brookfield exercises its redemption option on or after Oct. 15, 2025.
If that ends up happening, investors would get a strong return on their investment. Collecting 6.78% in distributions over the next three years, plus a 33.05% in appreciation on their investment.
Energy Transfer L.P. 7.375% Series C Fixed-to-Floating Rate Cumulative Preferred (ET.PC)
If you’re worried that interest rates will keep rising, putting more pressure on preferreds, this preferred stock could be the right choice for you. Energy Transfer L.P. 7.375% Series C Fixed-to-Floating Rate Cumulative Preferred (NYSE:ET.PC) was issued by Energy Transfer L.P (NYSE:ET).
Energy Transfer L.P. is a large owner of mid-stream oil and gas (pipeline) assets. What may make ET.PC stock appealing is the “floating rate” terms laid out in its prospectus. At today’s discounted price, this 7.375% coupon preferred stock has around an 8.4% forward annual yield.
But after May 15, 2023, the distribution rate switches over to the prevailing LIBOR rate, plus 4.53%. If rates keep rising, LIBOR will as well. This could result in ET.PC having a much higher coupon than it does today. This may help keep it steady in a rising-rate environment.
Pebblebrook Hotel Trust 6.3% Series F Cumulative Preferred (PEB.PF)
It makes sense that Pebblebrook Hotel Trust 6.3% Series F Cumulative Preferred (NYSE:PEB.PF) is one of the preferred stocks trading at a discount. Post-pandemic “revenge travel” notwithstanding, Pebblebrook Hotel Trust’s (NYSE:PEB) recovery could be hampered by inflationary pressures.
At least, that’s the view of analysts at Hedgeye, who late last month recommended the common shares as a short idea. Presumably, challenges with the underlying company could mean more uncertainty for PEB.PF stock, which admittedly may be riskier than many of the names listed above.
On the other hand, these risks may be more than priced-in. As a cumulative preferred stock, unpaid preferred dividends accrue. PEB.PF also trades at around a 15.75% discount to par value, and has a forward yield of around 7.43%. More research may be warranted, but put it on your watchlist. Risk/return may be still in your favor.
Public Storage 4.7% Cumulative Preferred Series J (PSA.PJ)
Many real estate investment trust investors hold shares in self-storage giant Public Storage (NYSE:PSA). This high-quality REIT’s common shares currently yield 2.61%. If you’re looking for a yield that does a better job at keeping up with inflation, however, Public Storage’s preferred shares may be a better option.
For instance, Public Storage 4.7% Cumulative Preferred Series J (NYSE:PSA.PJ). It currently has a forward yield of 5.22%. This preferred stock also trades at around a 10% discount to par value. Again, like with some of the low-coupon preferred stocks trading at a discount, Public Storage may have little reason to redeem it.
So then, is PSA.PJ stock a buy? Maybe not right now. Factoring in the risk of more rate hikes, you may want to wait until there’s a further discount before entering a position. Keep an eye on it for now.
AT&T 4.75% Cumulative Preferred Series C (T.PC)
With its forward dividend yield of 6.59%, many investors treat common shares in AT&T (NYSE:T) almost like a preferred stock. They buy it because of the dividend, with little regard for its long-term upside potential.
However, chasing yield has resulted in losses for long-time common shareholders. Investors attracted to the cash flows of AT&T, therefore, may want to consider buying one of its most actively traded preferred shares, AT&T 4.75% Cumulative Preferred Series C (NYSE:T.PC) instead.
At today’s discounted price (21.2% below par value), T.PC stock currently sports a forward yield of 6%. Not too far below the common stock’s forward yield — all while possibly having less downside risk. Besides the chance of higher volatility with T common stock, much like how it slashed its dividend earlier this year, “Ma Bell” could again slash the common stock’s quarterly payout.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.