Income Preferred Stocks, For Widows And Orphans

Co-produced with Treading Softly.

When it comes to ultra-low-risk investments, I often hear the term tossed around that a specific investment is a “widows and orphans” idea. What does this mean?

Simply put: It’s as close to a set-and-forget investment as you can buy.

The idea here is that orphans and widows don’t have the knowledge, skill, or time to manage an investment portfolio, and it must be as low risk and as low management time required as possible. Yet you still want something that is going to have a better return than no-risk assets like Treasuries.

So when it comes to these investments, many would readily accept that they rarely cross paths with high-yield income investments.

That belief would be misguided.

While I accept that many of my varied picks over the year and the picks in the High Dividend Opportunities Model Portfolio do accept a higher risk level than many would aptly call “widows and orphans” investments, I would also be remiss to state that “accidental high yielders” can be in the form of these exceptionally low-risk investments.

A Conceptual Challenge

Let me ask you this, what is a recurring theme from retirees and investors when they get worried or scared about the stock market? What do they do?

They sell, liquidate shares, and get cash.

Where do they put that? Their bank account.

Why do they do that? They think it’s a safe place to store cash.

I wouldn’t disagree with them on that. There always have been those among us who believe all banks are inherently risky and thus untrustworthy, so they pick their mattress over an FDIC-insured account. That’s rightfully their choice, but your house burning, flooding, being robbed, or another incident that might destroy cash in your mattress occurs much more frequently than a bank failing.

Bank of America (BAC), Citi (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) all have over $1 Trillion in deposits. The consensus is that these large banks are unlikely to go anywhere anytime soon. Could a deep recession hurt them? Yes. Could their common shares be negatively impacted? Definitely. Are these banks going to survive much longer than us? I’d bet they will.

Let’s Talk About Risk Tolerance and Necessary Risk

I evaluate risk in various categories. Likely, to some degree, we all do. We’ve just lived through a global pandemic where risk/reward decisions presented a daily evaluation of what used to be normal actions in the course of average everyday life.

The moment you leave your house, you accept any number of risks from an injury or any number of unforeseen death scenarios. Few of us sit and evaluate them in turn, we accept that those are unseen but necessary risks as part of our daily lives.

Outside of those risks, we have other risks which we take on by choice. We may choose to do high-risk sports, work a higher-risk job, or engage in risky activities. In those moments, we can take steps to reduce the potential negative outcomes, but we decide the risk is worth the reward.

When it comes to investing, we call this willingness to accept levels of risk one’s risk tolerance. Most investors have a low appetite for risk overall, and as they get more familiar with the market may take on more risk to achieve higher rewards while taking steps to mitigate the downside risks.

With widows and orphans, the goal is to accept as little risk as possible while acknowledging the reward will also be stunted.

I’ve helped thousands in their walk into and through retirement. I’ve talked to thousands about their risk tolerance and what they feel comfortable holding and investing in. One key tenet that I like to remind people is that they do not need to invest in anything riskier than they feel comfortable doing, especially if they can still meet their income goals.

If you only need $40,000 annually and have $1 million to invest, there is no need to go out and buy risky securities unless you personally want to. Meet your goal with as little risk as possible. It’s why High Dividend Opportunities members join in the first place; we can help see pitfalls and issues in high-yielding investments and help them avoid them.

So today, acknowledging that risk must be at a very low level, and reward should still be something you can be excited about, I want to highlight multiple buy, hold, and forget preferred securities that I would put into any widows or orphans portfolio without hesitation.

Preferred Holdings to Hold Until Death

When we look across the spectrum of preferreds that offer low-risk, long-term holding potential, I am looking at fixed-rate investments, as this widow or orphan will likely be holding this investment for decades, and I don’t want their income to be variable when simply fixing it in place would be attractive.

At my criteria, I am looking for

• Ultra-low-risk fixed-rate preferreds
• Low yield at PAR to reduce potential call risk in the future
• Large discount to PAR pricing, to allow for large capital gains in the event of a call in the future
• Attractive current yield.

The list below are holdings I would buy now if one could live happily on 6% yields alone, plus they pay Qualified Dividends if held in a taxable account. They would have a very low chance of having their holdings called away from them due to their low-interest rate at PAR. Due to this low rate at issuance, they have all sold off heavily and provide large discounts and thus big returns in the unlikely event of a call.

Sticking to big banking preferreds, I would buy:

JPMorgan Chase & Co., 4.55% Dep Shares Non-Cumulative Preferred Stock Series JJ (JPM.PK) – current yield 6.2%.

JPMorgan Chase & Co., 4.20% Dep Shares Non-Cumulative Preferred Stock Series MM (JPM.PM) – current yield 6.1%.

Bank of America Corp. 4.125% Depositary Shares Non-Cumulative Preferred Stock Series PP (BAC.PP) – current yield 6.3%.

Bank of America Corp. 4.375% Depositary Shares Non-Cumulative Preferred Stock Series NN (BAC.PO) – current yield 6.3%.

Wells Fargo & Co. 4.75% Dep Shares Non-Cumulative Perpetual Class A Preferred Stock Series Z (WFC.PZ) – current yield 6.6%.

Wells Fargo & Co 4.25% Dep Shares Non-Cumulative Perpetual Class A Preferred Stock Series DD (WFC.PD) – current yield 6.6%.

Conclusion

An investor or retiree who can live off of 6% alone would be remiss to miss out on the chance of a lifetime by letting these outstanding preferred securities pass them by. While non-cumulative, the risk is exceptionally low that any of these banking institutions would stop paying common dividends to stop paying their preferred dividends.

Your beloved widow or orphan would simply need to continue to hold these securities for decades to come and enjoy the dividends as they roll in.

While the price movement due to recent rate hikes has potentially been worrisome to prior holders, buying at a steep discount to PAR value will create a highly attractive and psychologically-beneficial capital gains cushion in the event of a future rate hiking cycle. Furthermore, the rock-bottom interest rates these banks achieved during issuance make these perpetual preferreds the lowest on the chopping block to be replaced.

Want lower stress and more relaxation? For many, selling shares and hoarding cash in their bank account is one method of doing so.

I recommend you become a preferred equity holder to the banks themselves, let them pay you 6% for your time, and enjoy the safety of income that they provide.

That’s possible through careful income investing. All you have to do is act!