Another day, another preferred to buy. After reading Preferred Shares 101 and 102, you should be well-versed in why we are buying preferred and which types of preferred we are targeting. As a recap, we are looking for preferred shares that are “Cumulative Redeemable Perpetual and Fixed.”
Before we jump into the Rule of 72, I want to talk about the naming convention of preferreds. There can be many different names for the same preferred- this is because each platform has there own way of displaying each preferred. I have included a cutout from the website Quantumonline.
The best advice I can give you is to learn how to read each website or platform you use. The naming comes from the ticker symbol of your company, say GLOP. Then the particular preferred has a series letter, say series C. So on my platform, Wells Fargo, you will see this series of preferred names as GLOP.C.
Municipal Bonds: Tax-Free Goodness
It may take a little while to get used to; however, there is one silver lining. When you search for a company on your platform, the preferreds are sometimes auto-populated in the search results. These search results will help you in your quest to find the preferreds of choice. Look at my results from Wells Fargo below. I am confident you can figure this out rather quickly. Now let’s move on to the Rule of 72.
The Rule of 72 simply states that if you divide the yield of a particular security by 72, it will give you how many years it will take to double your money. Don’t worry; it is far easier when you do it with the numbers.
Let’s start with AT&T (T). The yield for T is currently around 7%. Following the Rule of 72, I would divide 72 by 7 (72/7) and arrive at the number 10.3. So it would take me roughly ten years to double my money by investing in T.
Simple enough, right? You can use the Rule of 72 for all of your security purchases, not just preferreds. The problem is that once you past 4-5% dividend yields in common stocks, there is usually an underlying issue with the companies. Some companies like Prudential (PRU, 5.5%), AT&T (T, 7%), and Altria (MO, 8%) have higher yields, but most do not. My favorite common stocks, besides the higher yield ones listed, are McDonald’s (MCD, 2.5%), Johnson & Johnson (JNJ, 2.5%), and Proctor & Gamble (PG, 2.5%).
Investing for Dividends 102: Keeping Score
There are other ways to get higher yields. You can buy REITs (read my Introduction to REIT series). Also, read my article “Stock Market Investing 106: High Yield Alternative Investments.” However, learning about preferreds can be a very lucrative high yield alternative investment. It’ll take a little math, though.
We want to buy preferred with a yield above 6% at the time that we purchase them. That will double our money every 12 years. Remember this number in your buying adventures.
The most important lesson for today, besides the Rule of 72, is that preferreds have a fixed dividend payout. At least the “Cumulative Redeemable Perpetual and Fixed” ones that we are researching. Remember, the floating interest rate controls others- we don’t want these.
For example, when GLOP.C was released, it sold for $25 and had an annual dividend payment of $2.125- this gives it a dividend yield of 8.5% (2.125/25). The 8.5% is usually in the title of the preferred. GLOP.C is a fixed to floating preferred, which means that its fixed rate is effective until the call date. I bought this preferred because it was my first foray into the world of preferreds.
Dividends vs. Royalties part I
Okay, now we know the preferred dividend yield the day it starts trading on the stock market. Preferred trade like stocks, and no matter the price you pay for them, you will still receive the exact dividend yield. Here are some different scenarios you may find in the wild.
GLOP.C trading for $22 will net you a 9.6% yield.
GLOP.C trading for $20 will earn you a 10.6% yield.
GLOP.C trading for $18 will net you an 11.8% yield.
But can you find these deals out in the wild? Yes, you can. They may be risky because the underlying company may be about to fail. Preferreds usually trade with the risk of the underlying company. I have a screening process that I use, and I will discuss it in the following article in the series. Let’s see how I did when investing with GLOP.C.
The above picture may be hard to understand, so that I will spell it out for you. I own 22 shares of GLOP.C with an average price purchase of $16. The yield would calculate to 13.28% (2.125/16). Not only do I have a significant dividend yield that will double my money in 5.5 years (72/13), but I also have some capital appreciation, meaning the price of the shares went up.
The price of each share is now $21.61. In total, I am up $122 or 35% from my purchase in GLOP.C on top of the dividend yield. Remember, GLOP.C was a risky investment because of the underlying company. You can buy lower-yield products from safer companies. But, to me, it was worth the risk. I did not take a massive position in the preferred, and as you can see, I bought incrementally into the company.
Passive Income: Royalties vs. Automation
My first purchase was after I finished the book “The Billionaires Secret.” I did not believe it was so easy to make money. Yes, it is that easy. The hardest part of buying preferred is finding them. We will talk more about that in the following article. If you want me to go in-depth in my purchases of GLOP.C, please let me know- this has been a very lucrative purchase for me.
Now, I have some excellent options. If the price starts to go down, I can sell and make a good amount of money; I have already been paid $15 of dividends as well. Or, I can buy more shares at a lower price. It depends on how I feel about the company at the moment.
Why did the price go up so much in GLOP.C? Remember, right now, we are in a low-interest-rate environment. When I bought GLOP.C in October of 2020, for $13 (yield 16.3%), everyone was running to buy Tesla, Apple, and Zoom. However, over the last six months, people are now looking for fixed-income securities.
Fixed income is securities that pay at a fixed rate, like bonds and preferreds. With fixed income, you exactly know what you will be getting at your purchase price. No surprises, as long as the company stays solvent. Bonds are paying 1-2% currently, so where can you go to get higher yields? That is correct- preferred shares.
Is Saving Money Bad?
The need for yield is what drove up the price of GLOP.C and all of my preferred, for that matter. I would love to buy more preferreds, but you will want to stay at that level once you get the taste of 10% yields.
On a side note, Wells Fargo has a handy yield calculation feature. You can see the current yield of security as long as you own one share. If I am monitoring a particular preferred, I buy one or two shares of it and observe the yield. Once it gets to where I want it, I make a purchasing decision. The current yield is a factor of the current dividend divided by the price. It does not show your yield on cost or the dividend divided by the price you paid. GLOP.C is offering 9.8%; however, my yield on cost is 13%.
This article may have run long, but it is essential to understand the power of preferreds. With a bit of research, you can amass great wealth through preferreds. Not many people understand preferreds, and far fewer are willing to do the necessary research to find amazing deals.
Preferreds are not something people brag about, like Telsa or Apple. Boring companies like REITs, transportation, energy, and financials will issue preferreds. I absolutely adore preferred and wish I had more time to sort through the research phase to find more good deals.
The following article will show you how to research these deals and weed out the not-so-hot companies and bad preferreds. Once you have an excellent research mechanism, you will be pulling in purchases that get you over a 10% yield. Until next time!
Check out our Merchandise Shop on Redbubble: (here)
Follow us on our Facebook Page (here)
Join our Facebook group (here)
Follow us on Pinterest at:
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Leave a Reply