How does a steady flow of income from dividend payments sound? How about 24 payments a year for an average yield of 6.94%?
If you love earning dividends – especially big, safe dividends, then you should also consider preferred stocks.
In this report, we’ll reveal our six favorite preferred stocks that have been hand-selected from our proprietary income system. These are investments we believe you can buy and hold forever.
Our 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 we list 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 will put an extra 40 shares in your portfolio in the second year. And at a 4% yield, your annual dividend would climb to $416. Now, an extra $16 dollars isn’t much. But over time, reinvesting will compound your wealth.
For example, by the 10th year, your yield on initial investment would climb to 5.7%. In the 20th year, it would reach 8.4%, and your annual dividend would 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 the importance of saving for taxes, let’s get to the preferred shares…
Safer Than Normal Stocks
Owning preferred stock – also called preferred shares – puts you ahead of normal shareholders. You have a higher claim on both the company’s dividends and its assets: You’re first in line at the drinking fountain.
(However, 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 into 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.
This includes 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 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 No. 1: Digital Realty Trust Inc. 5.850% Series K Cumulative Redeemable Preferred Stock (NYSE: DLR.PRK)
Digital Realty Trust supports the world’s leading enterprises and service providers by delivering the full spectrum of data center, colocation and interconnection solutions. Digital Realty’s global data center footprint gives customers access to the connected communities that matter to them with more than 284 facilities in 48 metros across 23 countries on six continents.
The company began distributing dividends in 2019 and has been increasing its cash and revenue to support further dividends to preferred shareholders.
Total revenue has increased by roughly $700 million between 2019 and 2020, growing to $3.903 billion in 2020. Its annual revenue has consistently grown for more than four years.
The company’s net income has grown in the past four years, with the exception of the 2020 pandemic business expenses. Net income grew from $331.2 million to $579.7 million from 2018 to 2019, but then it fell back to $356.4 million in 2020.
Net income is on its way back to previous growth levels. It’s at $564.7 million over the last 12 months.
The company has also increased its free cash flow consistently every year, moving from $1.3 billion in 2018 to $1.7 billion in 2020.
With growing revenue and net income, Digital Realty Trust will be in a comfortable position to pay preferred dividends for years to come.
It currently yields 5.23%.
Forever Preferred Stock No. 2: Capital One Financial 5% Fixed-Rate Noncumulative Perpetual Preferred Stock, Series I (NYSE: COF.PRI)
You may have one of Capital One’s 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 in net income and $11.82 in earnings per share on a record $28 billion in revenue.
In 2020, Capital One Financial generated $28 billion in revenue with $2.714 billion in net income and only $5.18 in earnings per share.
The sharp decline in net income was mainly the result of the pandemic. Net income for the trailing 12 months is up to $11.83 billion.
Capital One Financial increased its free cash flow from $12.1 billion in 2018 to $15.7 billion in 2019, then $15.9 billion in 2020.
With record sales and earnings expected to continue, Capital One Financial should have no trouble putting big dividends in preferred shareholders’ wallets for years to come.
It yields 4.62%.
Forever Preferred Stock No. 3: Compass Diversified Holdings 7.25% Series A Perpetual Preferred Shares (NYSE: CODI.PRA)
Private equity investments aren’t for just 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 the interest payments on loans it extends to these companies and the profits it receives upon a sale.
At the end of 2019, the company reported net income of $307 million. This came mostly from sales of investments Clean Earth and Manitoba Harvest, which combined for more than $330 million.
The company has steadily increased revenues since 2019, growing from $1.45 billion to $1.84 billion in the last 12 months. Its revenue growth is comparable to its growing free cash flow, which has more than doubled from $49.6 million in 2019 to $133.28 million over the last 12 months.
The company is in a position to continue paying its attractive 7.06% dividend for years to come.
Forever Preferred Stock No. 4: Landmark Infrastructure Partners LP Series A Cumulative Redeemable Perpetual Preferred Units (Nasdaq: LMRKP)
Landmark Infrastructure Partners is engaged in the acquisition, development, ownership and management of a portfolio of real property interests and infrastructure assets that are leased to companies in the wireless communication, outdoor advertising and renewable power generation industries.
The company has increased its total revenue from $59.3 million in 2019 to $62.3 million over the last twelve months. In this period, it has also increased net income by more than 65%, from $21.5 million to $36.4 million. This company has improved its free cash flow from $18.8 million to $35.99 million in this period as well.
With a consistent high-yield dividend and improving financials, this company has the cash to continue paying $0.50 dividends every quarter for the foreseeable future.
It currently yields 7.83%.
Forever Preferred Stock No. 5: Energy Transfer Operating LP 7.625% Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (NYSE: ETP.PRD)
Energy Transfer Operating LP is one of the largest and most diversified midstream energy companies in the U.S. It has more than 90,000 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 on the volume of oil and gas transported and stored in its network, so it’s more insulated than other energy companies that are affected by 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 slowly rising. Free cash flow increased from $2.04 billion in 2019 to $2.23 billion in 2020. Free cash flow generated in the last twelve months is $6.48 billion, leaving it with plenty of money to distribute preferred dividends. Total revenue fell from $54.2 billion in 2019 to $38.9 billion in 2020, but it is rebounding. And the company has generated $44.3 billion in total revenue since July 2020.
Although the yield is slightly below the threshold, increasing cash flow and revenues will enable the company to continue paying consistent dividends.
It currently yields 8.32%.
Forever Preferred Stock No. 6: Global Ship Lease Inc. 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares (NYSE: GSL.PRB)
Global Ship Lease Inc. owns and charters containerships of various sizes under fixed-rate charters to container shipping companies.
This shipping company has distributed a quarterly $0.5468 dividend since 2014, and it is in an excellent position to continue paying its preferred shareholders.
Total revenue for the company has steadily increased since 2018. That year, the company generated $157.09 million. It increased revenues again by more than 50% in 2019 and generated $282.81 million in 2020. It is on pace to record another year of increased revenue in 2021. Revenue is currently at $284.84 million for the last 12 months.
As its total revenue has increased, so has its net income. The company has seen its net income grow more than 275%, from a loss of $57.36 million in 2018 to $41.56 million in 2020. And it will continue to increase net income through 2021.
The company is also increasing its cash position. Its free cash flow grew from $33.43 million in 2018 to $77.22 million over the last 12 months.
Its current yield is 8.58%.
The Cure for Stock Market Volatility
We believe that forever preferred stocks are the cure for stock market fears and volatility. While the other investors are biting 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 6.11%. 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 for the long haul.
Good investing,
The Liberty Through Wealth Research Team
Updated 8/17/21