Preferreds: Play `Em Right, And Get Yield Plus GrowthJoan Warner
Preferred stocks, those half-breed securities that share traits with both common stocks and bonds, have made a comeback after being overshadowed in the 1980s. Companies are issuing more because debt is passe. And investors desperate for decent yields find preferreds can be appealing alternatives to corporate bonds.
People buy preferred stocks because they like the high dividends, liquidity, and relative price stability compared with common stocks. Remember, however, that your real return depends on more than a good-looking dividend. You need to examine the issuing company's fundamentals, the stock's ratings (preferreds, like other fixed-income vehicles, get tracked by the bond-rating agencies), and its call features--when the company can buy back the stock from you, and for how much.
Although yields have come down somewhat since 1991, many analysts now believe preferreds can also be turnaround plays, when the issuer is a company that stands to gain from the recovery. For example, PaineWebber Senior Vice-President Ron Rosen is bullish on West Coast banks such as First Interstate and Wells Fargo, which have been big issuers of straight preferred shares. "As the image of California banking turns around, you'll see some price appreciation along with 9%-plus yields," says Rosen.
GOLDEN OLDIES. Eric Ryback, whose Lindner Dividend Fund is 50% invested in preferreds, is holding on to some older issues with juicy yields and depressed prices. Among his favorites: Transco Energy convertible preferreds, trading around $40 from their $50 issue price and yielding 12%. He sees asset sales and a price rebound in Transco's future.
A recent issue Ryback likes is Varity Corp.'s convertible preferred, trading at a slight premium and yielding 9%. Varity, the former Massey-Ferguson, is tied to the automotive and agricultural sectors. Ryback also cites National Intergroup, which controls several large retail distributors. Its 10% straight preferreds, trading near their issue price of $50, are callable next year. "So there's not much upside, but meanwhile, you're getting triple what you get in passbook savings," he says.
Investors who want to ride the recovery may choose to stick with common stocks, which have greater appreciation potential and often pay dividends. But for income-seekers with a nose for strengthening companies, preferreds may offer the best of both worlds.
SOME ANALYSTS' PICKS Issuer Price* Yield* FIRST 26 9.5% INTERSTATE NATIONAL 50 10.0 INTERGROUP TRANSCO 39 3/8 12.0 VARITY 14 3/8 9.0 *As of May 5 DATA: BRIDGE INFORMATION SYSTEMS INC.