Floating Away: The Magic of Floating Rate Preferred Shares

Something strange happened to me the other day; I received more money from one of my preferred shares than anticipated.

Rarely do things surprise me, but this was a great way to start the day. Nothing makes you feel more special than earning more money on your investments than you thought.

But what happened? Why did I receive more money than the initial terms of my preferred shares? Let’s get into it, but first, I want to recap how outstanding preferred shares can be in your life.

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What are preferred shares? Preferred shares are shares you can purchase from a company on the stock market; however, they act more like bonds.

Preferred shares have a par value, usually $25. For the money, preferreds pay you quarterly dividends for the period specified in the prospectus.

Preferred shares are special because you can purchase them for lower than the par value of $25. If you can get a good deal on your preferred shares, you can increase the dividend yield inside of your income investing portfolio.

I think of preferred shares as gift cards. If you could purchase a $25 gift card for $20, would you take the opportunity? I know I would.

Let’s review the history of my preferred share. In October 2020, I bought 22 shares of Gaslog Partners Preferred Shares Series C, or GLOP.C for short. The par value of GLOP.C is $25, but I bought them for $14.78 each, for a total of $325.

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The yield I received back then was roughly 15%. On top of this fantastic yield, the price recovered to $25. Therefore, I was sitting on approximately 70% capital gains.

I received a dividend payment of $11.69 for over four years. I have collected $172 in dividends since October 2020.

Here is where things get interesting. My payment on June 15 was $15.33, not $11.69. Indeed, they had overpaid me. After receiving 13 quarterly dividends at the same rate, I was shocked to see a higher payment.

I started conducting my research to see what happened. The best place to find this data is the original prospectus, which can be found at Preferredstockchannel.com.

As the prospectus shows, GLOP.C pays an 8.5% dividend from March 15, 2019, to March 15, 2024. After March 15, 2024, the preferred converts from a fixed payment to a floating rate payment.

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It is important to remember that interest rates were relatively low in 2019. The Federal Funds rate around March 2019 was 2%.

The prospectus tells us that the future dividend would adjust to the floating rate of 3-month LIBOR plus 5.317%. Let’s take a look at LIBOR.

What is LIBOR? LIBOR was the London Interbank Offered Rate. It basically was the borrowing rate between banks and currencies. You can read more about LIBOR on Investopedia.com.

Our primary concern today is calculating the LIBOR plus 5.317% that the preferred share paid me last week. As you can see, the current LIBOR is roughly 5.6%.

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That means my dividend payments went from the original 8.5% yield to close to 11%. That is an incredible increase and why my payment jumped 31%.

When Gaslog Partners created the preferred shares, they probably didn’t anticipate interest rates rising above 5%. In this case, we are winners, but sometimes you can lose when rates decrease.

Using preferred shares in daily life. But enough about mathematics, how can you use preferred shares in daily life?

If you don’t know which common stocks to purchase or are looking strictly for income, preferred shares can become a significant part of your portfolio.

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Once you hone in on fantastic preferred shares, you’ll know if they represent great deals. I like to follow wonderful preferreds from Bank of America (BAC), Wells Fargo (WFC), and Public Storage (PSA).

When they go on sale, I can purchase them to obtain higher yields. The company will repurchase them at par value in the future, giving me capital gains.

If you are a new investor and don’t have much money, investing in preferreds can be a great way to start the wealth-building process.

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Integrating preferred shares into your income portfolio. Let’s say you have $50 per month to invest in high-yielding products.

You would want to purchase two preferred shares or baby bonds at the lowest price possible. Then, you can use the reminder to buy fraction shares in high-yield companies like Verizon (VZ) and AT&T (T).

Let’s look at Public Storage Preferred Share P (PSA.P). It currently sells for $17.61. For this, you would receive a total of $1 in dividends or $0.25 quarterly, which is a 5.6% yield.

After purchasing two shares of PSA.P, you would have $14.71 remaining to add even more income products to your portfolio. 

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Leveraging preferred shares is a great way to get outstanding deals. The book “The Billionaire’s Secret” is a great place to start if you want to learn more about preferred shares.

Income investing for the win!! I am a hardcore income investor for the reasons we discussed today. I love to know exactly how much income I receive when I purchase stocks.

Understanding the difference between income investing, dividend growth, index funds, and growth investing takes a while.

They all offer great results for patient investors, but I personally want my money now. I want to know that I will receive a great deal as soon as I press the “buy” button.

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Conclusion. Preferred shares can change your life. Instead of purchasing that $50 Playstation 5 controller, purchase two fixed-to-floating preferred shares.

These will give you a lifetime of income and eventually allow you to purchase that controller with the dividends it produces.

Very few people understand how to generate income from their investments. Preferred shares are a hidden oasis inside of the stock market.

Most people will gravitate to stocks like Nivida (NVDA) as they become hot and their prices shoot through the roof.

This reminds me of when Tesla (TSLA) was rising almost daily. However, income investors look for deep discounts on solid products.

Becoming an Entrepreneur #5

We stay under the radar and use our dividends to fund our lifestyles. My wife and I just bought a massive destination RV.

We can cover the entire RV payment from dividends, but we still have a massive amount of cash flow remaining. We earn over $2,000 per month in dividends.

We started by purchasing floating rate preferred shares like GLOP.C. This tiny $25 product has changed my life. Good Luck!

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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. All Right Reserved Military Family Investing