A Wealthy Retirement Special Report:
Six Preferred Stocks to Buy and Hold Forever
How does a steady flow of income from 24 dividend payments a year for an average yield of 6.91% sound?
If you love getting dividends - and, more importantly, big and safe dividends - every year, then you need to consider forever preferred stocks. These are investments we believe you can buy and hold forever.
In this report, we’ll uncover our six favorite preferred stocks that have been hand-selected from our income system.
This 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 listing 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 puts an extra 40 shares in your portfolio 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 compounds your wealth.
For example, in year 10, your yield on initial investment would climb to 5.7%. In year 20, 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 taxes, let's get to the preferred shares...
Safer Than Normal Stocks
Owning preferred stock, or preferred shares, puts you ahead of normal shareholders. You have a higher claim on both the company’s dividends and assets: You’re first in line at the drinking fountain.
(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 in 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 I 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.
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Forever Preferred Stock #1:
National General Holdings Corp. 7.5% Depositary Shares, Non-Cumulative Preferred Series B (Nasdaq: NGHCO).
Yield: 7.5%
National General Holdings insures 2.8 million customers and is one of the top 20 underwriters of auto insurance in the U.S. Established in 1939, it has less than 4,700 employees but 22,000 independent insurance agents and brokers who sell its policies.
The company is growing both its top and bottom lines, with revenue and income climbing over the last few years. In 2015, revenue topped $2.5 billion - up 35% from the previous year. And net income climbed 49% to $156 million.
As National General continues to grow its sales and earnings, cash flow should follow suit. This will keep preferred shareholders happy with a plump and sustainable 7.5% yield.
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Forever Preferred Stock #2:
Allergan PLC. 5.50% Mandatory Convertible Preferred Shares, Series A (NYSE: AGN-A)
Yield: 7.6%
It shouldn’t be shocking news that the world’s population is growing.
But the demographics in developed nations are also shifting. They’re getting older. And older people need one thing more than anything else... healthcare.
Who’s going to help meet this growing demand?
One sector lining up to help is the pharmaceutical industry. It’s positioned to benefit big-time from a growing - and aging - population. And that’s good news for our next pick.
Allergan develops and sells medical aesthetics and over-the-counter products worldwide.
To expand its business, it’s focused on both organic growth and acquisitions. In 2015, R&D spending reached $2.3 billion, and Allergan acquired more than 10 major companies and assets.
Allergan already has blockbuster drugs such as Botox, Juvéderm and Linzess. But it’s working hard to add more. This will keep cash flowing to investors, and preferred shareholders can keep collecting big, safe dividends.
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Forever Preferred Stock #3:
Pacific Gas and Electric Corp. 6% Preferred Shares (NYSE: PCG-PA)
Yield: 4.8%
Americans love to consume. It’s in our nation’s DNA. Since the founding of this country, the “pursuit of happiness” has created a lust for the next great gadget and product.
And with every new washing machine, tablet or smart TV, the demand for energy grows.
Pacific Gas and Electric, or PG&E, generates and distributes electricity across northern and central California. The company also sells and delivers natural gas.
PG&E is a utility business that keeps cash flowing. This is great for paying a big and safe dividend. The company is under heavy regulation and sold off with the drop in natural gas prices. But in 2015, it still brought in more than $16 billion in sales and close to $1 billion in net income.
With utilities, you get reliability. PG&E has paid a dividend for more than 30 years to normal shareholders. This bodes well for preferred stockholders. Unless Americans radically change their consuming habits, this preferred dividend is as safe as safe can get.
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Forever Preferred Stock #4:
Bank of America Corporation Non-Cumulative Perpetual Convertible Preferred Shares, Series L (NYSE: BAC-L)
Yield: 6.1%
Bank of America is a household name. It’s one of the top banks in the world and provides a wide range of financial services. Today, its market cap is close to $150 billion.
With the boom in technology, the financial sector has exploded. The U.S. financial industry accounted for less than 3% of GDP in 1950. Today, it’s closer to 8%. And Bank of America commands a solid piece of that pie.
This has allowed it to pay normal stockholders for decades. So it can easily continue to pay preferred shareholders. Remember: Preferred owners are first in line and get to collect more. It’s a no-brainer investment if you’re looking for higher payouts from one of the world’s biggest banks.
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Forever Preferred Stock #5:
Wells Fargo & Company 8% Non-Cumulative Perpetual Class A Preferred Shares, Series J (NYSE: WFC-J)
Yield: 7.5%
Wells Fargo is another leading financial services firm. It operates in three segments: community banking, wholesale banking, and wealth and investment management.
The company had assets of $1.8 trillion, loans of $917 billion and deposits of $1.2 trillion at the end of 2015. Total revenue topped $90 billion, up 1.9% from 2014.
Wells Fargo runs efficiently and has a long history dating back to 1852. Today, one of its largest shareholders is Warren Buffett. His buy-and-hold-forever strategy is a great sign for preferred stockholders here.
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Forever Preferred Stock #6:
Alcoa Inc. Depository Shares Representing 1/10 Preferred Convertible Class B Series 1 (NYSE: AA-B)
Yield: 8.3%
Our next pick is a global player in the aluminum business.
Alcoa is the world’s top aluminum producer and manager. It mines, refines, smelts, fabricates and recycles aluminum.
Over the last few years, commodity prices tanked but Alcoa weathered the storm. Its revenue topped $10 billion in 2015. And the business has close to $2 billion in cash today. Alcoa is financially sound for the industry it’s in.
Demand for its products comes from many industries, including aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics and industrial applications.
Alcoa isn’t reliant on only a few customers. Its revenue stream is diversified. This allows it to pay a safe 8.3% preferred yield. And it will continue to pay stockholders for the foreseeable future.
The Cure for Stock Market Volatility
We believe that forever preferred stocks are the cure for stock market fears and volatility. While the rest of investors bite 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 6.91%. 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 over the long haul.
Good investing,
Brian Kehm
Research Associate
The Oxford Club
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