Cash no longer trash

Investing

Billionaire investor Ray Dalio reversed course on his oft-repeated axiom, but 6% yielding preferred stocks are like money in the bank.
Ray Dalio. (Photo by Eoin Noonan /Web Summit via Getty Images)

In a year when prices of both stocks and bonds have fallen in concert, some think preferred equity now combines the best of both worlds for investors with cash to spare who are still wary of taking on the risk of the stock market.

Preferred stock, a type of equity most commonly issued by financial institutions or utilities companies, is issued at a face value, usually $25, and offers regular dividend payments to shareholders.

Unlike bonds, preferred stocks have no maturity date when the principal must be repaid, though a company can redeem a class of preferred stock anytime after the “call date” provided for each issue.

In a worst-case scenario of liquidation, owners of preferred stock are repaid before common stockholders, but after bondholders if any assets remain. If banks reduce dividend payments like some did during the 2008 financial crisis, they’re typically required to pay preferred dividends in full before bringing regular dividends back to normal as well.

Many issues of preferred stock are offering yields of over 6% now after price declines driven by higher interest rates. Bank certificates of deposit are yielding as much as 3.5%, high enough that billionaire investor Ray Dalio reversed course on his oft-repeated axiom and said “I no longer think cash is trash” on Monday.

10-year Treasury yields have climbed near 4% too, but investors who are looking for higher steady interest payouts with limited additional risk could look toward these preferreds at regional banks that few think are in any serious trouble.

“This downturn is something that banks are prepared for. They haven’t overlent to the housing segment and there are much better underwriting standards than were in place in the 2000s leading up to the housing crisis,” says Argus analyst Stephen Biggar. “The health of the underlying equities I’m not concerned about, but this market is anything goes. People are bidding things to extremes–rates to high extremes and stocks to low extremes–but you’ve got to look at this as a long-term owner.”

Biggar singled out preferred stock at regional banks like KeyCorp, Fifth Third Bank, Regions Financial or PNC as fairly safe buys. Martin Fridson, CEO of Income Securities Advisors and editor of Forbes’ Income Securities Investor newsletter, highlighted southern bank Synovus Financial Corp. and First Republic Bank, which caters to high net worth clientele in affluent areas like southern California, Palm Beach and New York, as additional recommendations.

This article was first published on forbes.com