Preferred stock issues can include a lot of specific features, such as whether they are cumulative or not, convertible or not, and whether there are extraordinary call provisions.

With the massive increase in interest rates, preferred stocks with fixed-to-floating coupon rates are poised for significant, locked-in yield increases.

That’s a massive 2024 profit opportunity just waiting for you to jump in…

All (or almost all—there are always exceptions) preferred stocks have certain basic features:

  • Par value—typically $25 per share—which is the value on which other factors are based. Preferred stock can trade for more or less than the par value in the market.
  • The coupon rate determines the amount of the dividend payments. For example, if a preferred has a 6% coupon. The annual dividend will be 6% times $25.00, which equals $1.50 per share. Most preferred stocks pay quarterly.
  • A call date. Preferred stocks are perpetual, but almost all have a call date. After the call date, the issuing company can, at its discretion, call in the preferreds, paying the par value for the redeemed shares.

A small portion of the preferred stock universe has fixed-to-floating coupon rate features. This type of preferred stock pays the fixed designation coupon rate until the call date. Once the shares become callable, the company can either call in the shares or start paying a new coupon rate based on a floating rate formula. The formula will be the Secured Overnight Financing Rate (SOFR, which recently replaced LIBOR) plus an interest rate margin, which is designated in the prospectus.

For example, the Rithm Capital 7.5% Preferred A (RITM.PrA) shares are a recommended investment in my Dividend Hunter service. RITM.PA is callable starting on August 15, 2024. At that time, the coupon rate goes from 7.5% to SOFR plus 5.802%.

SOFR current sits at 5.345%. If that rate is the same in August, the RITM.PA coupon rate would jump to 11.147%. At that time, Rithm Capital can call in the shares for $25.00 or start paying the new coupon rate. RITM.PA currently trades for $23.00.

Here are several fixed-to-floating preferred shares with call dates in the first few months of 2024. The format will be stock name, including coupon rate (ticker)/current price/call date/fixed to floating interest margin.

Cherry Hill Mortgage Investment Corporation 8.25% Preferred B (CHMI.PrB)/$21.46/April 15, 2024/5.631%

Chimera Investment Corporation 8.0% Preferred B (CIM.PrB)/$21.85/March 30, 2024/5.791%

PennyMac Mortgage Investment Trust 8.125% Preferred A (PMT.PrA)/$21.85/March 15, 2024/5.831%

GasLog Partners LP 8.5% Preferred C (GLOP.PrC)/$23.27/March 15, 2024/5.317%

Of course, SOFR could go lower over the next few months. But if it stays above 3.0%, these preferreds will pay a higher coupon rate when they go from fixed to floating.

As always, do your own diligence before investing in any of these shares.

— Tim Plaehn

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Source: Investors Alley