075 - Don't Buy Overpriced Bond Funds, Buy These Instead

If you’re a dividend investor, you gotta know about preferred stocks, which are similar to bonds, but easier to find and buy. They’re also cheaper than bonds so you can stretch your money further. 

And since bonds are mostly overpriced right now, you need to pivot.

In this episode Tim shows you what he looks for when searching for preferred shares. 

And after scouring over 250 of these babies, we’ve got the 3 best preferreds you can buy right now. 

• OZKAP
• AFGE
• BEP/PRA

Plus an extra investment opportunity if you agree with our analysis of its risk vs potential reward.

• BPYPO

You could also get into a preferred share fund like one of these

• PFFD
• PFFA

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**DISCLAIMER**
Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

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Transcript

Welcome to Roaming Returns, a podcast about generating a passive income through investing, so that you don't have to wait till retirement to live your passions. If you're a dividend investor, you've got to know about preferred stocks, which are similar to bonds, but easier to find and buy. They're also cheaper than bonds, so you can stretch your money further.
And since bonds are mostly overpriced right now, you need to pivot. In this episode, Tim shows us what he looks for when searching for preferred shares. And after scouring over 250 of these babies, we've got the three best prefers you can buy right now, plus an extra investment opportunity if you agree with our analysis of its risk versus potential reward.
If you don't care about how we pick preferreds, skip to the 20-ish minute mark, so you can jump right in to our stock picks. Greetings and salutations. Okay, so last week I mentioned that we were probably going to do preferred shares this week, and that's what I ended up going with, because it's low-hanging fruit.
Preferred shares are like one of the better ways you can mitigate your risk when you're addressing an income portfolio, or when you're creating an income portfolio. What a preferred share is, like we've touched on it previously, a preferred share is like the second in line to get paid. You have the venture capitalists or initial investors, and you have the preferred shares, and then you have the common shareholders.
So when they pay the dividends out, it normally goes step one with the venture capitalists, step two with the preferreds, step three would be the common shares. But the venture capitalists, isn't that like short-lived, because it's mainly around the IPO time? It can be. But sometimes people just invest capital and they keep their shares forever, so.
I wasn't aware that that was actually a thing. The reason why they're a good mitigation of risk is because every preferred share that's offered actually has a par value, much like a bond does. Like a bond is a par value of 1,000 of a preferred share, oftentimes, but not always, the par value is 25.
Sometimes you'll find $10 ones, sometimes you'll find $50 ones, sometimes you'll find $100 ones, but generally speaking, it's 25. 50 and 100. So if you are looking at a preferred share that's supposed to be 25 and it's trading for $20, well that's good, that's a 20% discount, yay.
So that's how one of the ways that you can mitigate the risk is by knowing where to buy in at because they actually, the reason it's a par value is because when the companies buy them back, which sometimes they do, and sometimes they just let them meander on indefinitely, but sometimes they'll buy them back. When they buy them back, they have to buy them back for the call price or the par price, which would be $25. So basically if you buy them above that, you're increasing your risk of having a callback and losing money.
So that's exactly why it's imperative that you never buy above the par value or callback value. I mean, there are some good ones out there that are trading at like $27, $28, so then you'd have to make the determination, am I willing to take a 2% capital depreciation for the dividend that I'm getting? I mean, that's an individual investor question, but I generally don't purchase anything above the price. That would also be based on history too, right? Yeah.
And we've actually held preferred shares for years now, years and years, and I think twice it's actually happened where they actually bought them back. One time they bought them back and it was a really good return because we bought them at like 18 and they bought them back at 25, so we got $7 appreciation. Now, that wasn't all at once.
Obviously, they're going to buy them back when they have the money and that makes like a financial sense to pull all those preferred shares off the market. But it was trading at like 22 at the time, so we made $4 in price appreciation. Then they called it back at 25, so then it bumped us up from 22 something up to 25.
And you get to collect the dividend all the while while you're waiting on the price to appreciate from where you buy it back up to its par value, much like bonds. That's why when we did the bond episode, bonds you always want to buy when they're undervalue, under par, and same with preferred shares. It makes it super easy.
You look at a general stock, you never know if it's overpriced or underpriced. Even if you have your metrics, you're just guessing based on past information combined with future projections. It's an educated guess, but it's still a guess, whereas with preferreds, you know that 25 is their callback price.
I have a question. What is the difference between a bond and a preferred share? Why would a company issue a preferred versus a bond? I don't know. Don't know.
Okay. The difference is one's like a stock and the other one's a bond. And the bond is like a, they're both ways to get income when they, so they're taking on, they're taking on debt.
Yeah. I think, I think they, I think, again, I don't know a hundred percent, but I think they can actually offer more preferred shares for the same price they could for a bond because bond has such a high entry price. They can only have like, say if they offered say a million dollars worth of bonds, they're only going to have like a hundred thousand bonds.
Whereas if they offered a million dollars worth of preferreds, they'd have like 400,000 shares. Because preferreds also have terms, correct? Yes. Just like bonds.
So this is literally just like bonds. It's just a difference of like- It's a combination of bonds and stocks because they do, like bonds don't generally move like stocks do. They're up and down, but it depends on- Whereas preferreds are pretty much like- Preferreds move pretty much like the company stock does here.
That's interesting. So it's like a, it has that built in safety valve where if you buy under par, you know, you're getting undervalued investment. And another one that we had two, one we got, we had at 18 and it went up to 22, they bought it back.
Another one I bought for, again at 18, it went up to 26 and I didn't sell it. I was like, oh, and I'll keep going up. And they actually called it back when it was at 26.
So I lost a dollar. That's why that par value is so key and you should always know where your preferred shares lie. Because if you're ever over 25, there's a higher probability of them calling it back because they're actually saving money.
If it's say it's trading at 28 or 29, they call it back at 25, they're saving $4 per share. So- Which makes sense from a business standpoint. Yes, it does.
Okay. So now there's a couple of parameters that I actually look at when I'm researching preferreds and which ones I would like to buy. The first obviously is the premium, the discount.
It's the most important key piece of like initial information. If it's at a premium, I pretty much discount it. Like right away, I'm like, this is not even worth looking at, so I don't have to look any further.
Whereas if it's at a discount, then I can do further research and I go down to step two. Step two is the yield. Now the yield on preferreds is anywhere from like 4%, 3% up to like 40%.
Like the yields are all over the place, so you actually have to do a little bit of research in the actual parent company at this point. But you can actually, if you do like a cursory search like in your brokerage, you should be able to do like a filtered search for preferred shares and you can just go through a list of the preferreds. I'm like, well, that's over 25, that's over 25.
Or you can actually click on the thing and what is that, order it from lowest to highest or whatever. Filter it lowest to highest. When you're looking at the yield, though, there's one piece of information that you need to identify and that's whether it's cumulative or not.
What cumulative means in this case is if a company has a bad financial quarter and they say they suspend their dividend, which all preferred payout is a dividend, they suspend the dividend and then they pick it back up when their income gets, their financials get better down the road. Cumulative means you'll actually get your dividend payment back. So say they suspended quarter two and quarter three dividend, but they paid a dividend in quarter four, you would actually get a dividend for quarter two and quarter three and that's one of the huge differences between preferreds and common shares is if they- You'd only get it for quarter four, you wouldn't get the back pay for two and three.
Yes. That's huge. Now, you don't get voting rights.
Like if a common stock, you get voting rights. They ask like, I don't know who votes, like I said this before, like they send you information like we're thinking of doing this, what do you think? I just delete those. I don't care.
I got an email on one yesterday. I really don't care. More often than not, most of the preferreds actually are cumulative, but you will find a large- There's a large percentage of them that don't and that's a bad- It's not bad, but it's bad to me because I want the income.
But if you really believe in the company and you don't mind having a missed dividend, then by all means, you can purchase a non-cumulative if you want. So that's on the general plan. That's on the- In Schwab, I can't answer for- Any other brokerage except Vanguard.
Vanguard and Schwab and Robinhood, when you click on the preferred, it'll bring up the preferred page and it'll actually say, here's the yield, if it's cumulative or not. In Schwab, it actually lets you click on a tab that brings you to the issuing company or the parent company. That's the company that's actually issuing the preferred.
So like if, say, Bank of America, which has preferred shares, issues a preferred share. I think it's BA Preferred C or something like that, so it'd be BA slash PRC. If you click on that page, it'll bring you to the preferred share itself, but on the tab on the right, it'll actually take you to BAC, which is the Bank of America.
Do you need to actually look at the issuing company to identify a few things? The first would be the credit rating. Junk bond is anything below a BBB minus. What they call investment grade bonds or preferreds are BBB minus and above.
So that BBB minus would be like your cutoff. So once you determine the credit rating of the company, then you can actually go on to the issuing company's financials. We highlighted before when it came to stocks, you just scroll down.
Generally, they'll have all the financials further on down the page, and you can look at their revenue for this year, the revenue for this quarter, the revenue for the last three or four years. You'd want to make sure that they're not issuing preferreds to avoid bankruptcy. So if you click on the financials and you see that their profit margins are like negative 80 some percent and their revenue is like zero and their net cash is like negative 100 billion or whatever, you probably want to avoid those ones because there's no guarantee you'll get paid.
Like if they issue preferreds just to avoid bankruptcy and then they end up declaring bankruptcy, your preferred's gone. You're not going to get any money for it. So you want to identify the financials, make sure the company's in a pretty good financial place.
And like if you've subscribed to the actual email when I do preferred, there are times when the financials aren't that important, like profit margins not really that important. Like it can have a negative net profit margin as so long as it's generating revenue. But that's stuff that you have to feel out on your own if you find what you're comfortable with.
I'm comfortable with anything like between zero and negative 15 percent profit margins because so long as the revenue is growing. I was going to say as long as other metrics are actually in good areas. I also like to have the issuing company have a market cap that's pretty high like over say one or two billion small cap.
Small caps start in like the one to two billion. So like small cap, media cap and a large cap. You don't want something that's a micro cap like they only have like say a couple hundred million dollars worth of market cap and they're issuing preferred shares.
That's one that you probably want to avoid just because of there's a couple of reasons. The first I can think of would be liquidity. Like if they only have like say 100,000 shares out there, it's going to be very difficult to buy and sell because the more they have, the more often than not there will be people that are willing to sell their share.
And like with any investment, you need to find someone that's willing to sell so that you can buy. And it works on the opposite end. Vice versa.
If you say you hold like 10% of a company, it's gonna be very difficult to find people that want to buy 10% of a company that only has like $500 million market cap. The next thing you want to look at is the call date. Generally, when they issue preferreds, they actually will, I don't know if generally might be all the time.
I'm not sure if it's all the time. So I'm going to stay with generally. They'll say this preferred is good for five years and the callback date is X. That means at that date, they can pull all the preferred shares off the market.
Sometimes that happens. Sometimes they'll actually just roll over. It's like when you roll your IRA over or something like that.
It'll just roll over from say the callback date was November 1st of 2024. They get to that point and they determine it's not financially wise to call it back. They'll just roll it over to and then it'll go month by month at that point.
Then 12-1, they'll be like, oh, it's more like a month to month rental. Like if you're renting a house and you're in a gear lease, but then it goes to a month after your lease type deal. And like there are plenty of examples of ones that have call dates of like 2010, 2012.
The more research you do, you'll see that there's some that I've seen as far back as like 2004 that are 20 years past their call date, but they just keep on chugging along. And the reason for that is it all comes down to the financials. Like if the preferred is trading at like 20% or 50% below where it should be, they're not going to call it back.
They'll just roll it over. Whereas if it's trading for like, you know, say it's trading 10 or 15 or 20% above where it should be, there's a higher probability they'll call it back at that point because they're going to save a butt ton of money. And the last thing that I look at and that you should look at as well is every preferred share has a tab called convertible.
All that really means is that you have the option of trading your convertible preferred shares for the issuing company's stock at a certain date. So if you're like, go back to the Bank of America example again, if you're in a Bank of America and you really like Bank of America, you got into the Bank of America preferred because it actually has a higher dividend yield than the Bank of America stock. And at a certain point in time, they'll be like, do you want to convert your preferred shares into actual Bank of America stock? Well, that's a choice you can make or you can then just sell back the preferreds at that point.
So that's entirely up to the individual investor and the company they're buying preferreds in. Does that happen automatically sometimes? Sometimes. Because I thought one of ours did that and you were like, what the hell is this garbage? So you have to like, that's another thing that would like if you're looking at the financials of the issuing company and you really like the issuing company, it makes sense to buy the preferred because there could be a chance that you could be able to convert it into regular shares or they might actually automatically convert it into regular shares depending on what the case may be.
And some are even mandatory. Yeah, there are ones that are mandatory. There's not an option though.
They literally just say, okay, at the call date, we're going to take your preferred shares and give you 0.5 common shares. So you have to make damn sure that you want to be in the company at that point. Which is fine if you like the underlying company, which kind of is the whole point.
The reason that I use preferred shares, honestly, is because when you're looking more often than not, again, not always, but more often than not, the preferred shares for the companies will actually yield more than the common shares. So it's just a way of getting more yield out of a company that I would otherwise probably be inclined to invest in. And you're going to see by a couple of the ones that I found, I came up with four.
I was going to do three, but I came up with four because one's kind of risky. But you'll see when we go through this and I'll highlight it, there's really good companies that you could get a 2% dividend on, but you can get a 5% or 6% on their preferred share. So why would you not? Why would you not go for the preferred route? The other reason for a preferred, even if the preferred is paying a little bit less, is if you don't have as much confidence in the dividend being paid out and you want that security of payout.
So those would be the two reasons to get into these. Plus, I kind of think the par value thing makes it easier to know when they're under value. It's easier.
So when you're first starting out, that's when I first started doing the income investing, it made it easier to come up with a valuation point because I knew exactly what it was worth in the company's eyes. And that gives you that safety margin, which then if you get paid the dividends and you make a little bit of a lift, that's like an extra safety or an extra like a training wheel type deal. Like it's a pretty sweet deal.
Now, what I did not include is when you look up preferred, there are actually closed-ended funds such as PFFD and PFFA, which they literally just go out and scour the marketplace for preferreds that are in a good valuation with good yield and they'll just buy them up. So it's literally a fund of like a hundred different preferred shares and they have pretty nice yields. Like I think PFFA is like seven and a half, eight and a half percent around there.
PFFD is like 10 to 11% yield, but just like stocks, bonds, preferreds, not all closed-ended preferred funds are good. Like PFFD is kind of crap compared to PFFA if you actually dig into it and look at what they're holding and their track record. So that is an option.
If you don't want to do the work to do your individual research on your preferred, you can just buy PFFA, which is currently like $22. So it's $3 under the $25, you know, $25, like the preferred closed-ended funds should not be trading for over $25. If they are, that means you're actually in a premium area.
Then you have to do like historical research to determine if your premium is historically normal or if it's high or low at that point. But that is a way to actually simplify all this and just buy funds that deal with this. But it's actually quite easy when you do a screener and you can just pull up hundreds of different preferreds.
I mean, it can be kind of overwhelming, but if you stick to what I just mentioned up above with those couple of points, you should be able to take that say 500, 600 preferreds and drop it down to like 30 or 40 pretty quickly. I mean, the cool thing with the funds or like the collective CEFs and stuff is they're kind of like the index thing, but you get higher yields, which we're always looking for those yields. So if you want to keep things simple where you don't have to take the time on a more regular basis, I guess I should say, to actually determine the status of each one of your individual holdings, you want to probably go towards more of those collective investments.
PDI with bonds, and I forget what the other one was. YYY? YYY is all weird. We're trying to get out of the PDI.
It's overvalued. But I'm just using that as an example. Like PDI is a bond fund.
So instead of having to scour for bonds, because they're kind of a pain in the butt. Researching preferreds is probably 200% easier than researching bonds. Yeah.
So that's part of the reason we do PDI and YYY. Like I'm saying, because you specifically can research using screeners for preferred way easier than bonds. Bonds are... Bonds are a special animal.
You got to be really familiar with your brokerage account to actually do a pretty quick research of bonds. If you don't and you've never done it, it's going to be cumbersome and tedious and not overwhelming, but just like frustrating. What the hell? But finding preferreds is way easier.
That being said, I have four. So now that we got through all the why the heck or how the heck we get to these, here's the ones that Tim found. First one is OZKAP.
Okay. If you're familiar with small, like the small cap banks, this is the bank of Ozark. It's probably one of the best small cap banks.
So keep that in mind when you're hearing all this. OZKAP is at a 24% discount at the current moment, which I did this. I pulled all this information on Friday of last week.
I know the markets are down pretty good today. So that actually might be a bigger discount and the prices aren't going to be accurate. But it's as of Friday, this was accurate.
It was trading at $18.89. This is the OZKAP. It was trading at $18.89. It had a current yield of 6.12 and it paid out $0.29 per share quarterly. It's a BBB minus credit rating.
So that's again, that's higher than Junk Bond. That's the floor. You can't go lower than that.
It's in the sweet spot. So like I said, OZK is the issuing company. OZK has a market cap of $5 billion and it trades at $44.14. And it yields 3.7. So like what I was saying above, if you like OZK, why would you not take advantage of their preferreds for a 6.12 yield as opposed to a 3.7 yield and you can buy more shares because that's $18.89 versus $44.14. OZK has a lower P.E. I didn't mention that before, but I assume that you do that anytime you pull up a stock, you look at the P.E.s and the earnings per share and stuff like that.
If you don't, you should. It's just a quick way to identify generally like a generalization if it's high or low compared to its peers and how its earnings per share is doing and things of that nature. It's pretty easy to do because it's really just listed.
So it's simple. Okay, so the OZK P.E. of 7.36 and in the bank sector, it's like 16 point something is the peers. You're more than 100% off of what the peers average is of this sector.
It has an amazing earnings per share of 587. If you put that in context, you look at Amazon or Google, they're generally throwing off like a two something, 230, 250 earnings per share. This one actually, they make a lot of money per share.
Well, they're smaller caps. They have less shares. What that means is they're making a lot of money, but they have a smaller share pool.
It's cool. It has, OZK has really good net profit margins as well. Right now, it's 43% net profit margin in quarter three and it's been around there.
It's been in the 38 to 47 range for as long as I've been paying attention to OZK, which has been two and a half years. They've also, OZK has also reduced their debt by over 60% the last two years and they've increased their revenue each of the past five. That's pretty sweet.
Yeah, they had a lot of debt coming out of the virus situation, but they've actually reduced that a lot and they've actually increased their revenue even through the virus situation. That's- The revenue has grown from $884 million to $1.4 billion in the last five years. It only has a 15% dividend payout rate, meaning they have plenty of cash on hand, which is awesome because- That's really low.
That's cool. The more cash they have on hand, the more apt they are to always pay out their preferreds. They have plenty of cash on hand.
Last I was able to find, they have over a billion dollars in cash on hand. Okay, OZKAP, which is the preferred of the OZK. It's going to be a lot of letters.
The OZK preferred has a call date of 11-15-2026. We got a year before they can call it back, so you're going to be gaining that 6% uninterrupted for a year at the minimum. But again, if that stays undervalued- If it stays undervalued, they're not going to call it back if it's under 25.
But- And it's at 1889 as of Friday. And it's not convertible, which is nice. I don't like convertible ones.
I don't like- Again, I'm a wild pony. I don't like being told what I have to do, so I like the ones that give me the option. But the only thing that's bad about OZKAP is it's not cumulative, that meaning if they miss their dividend, like we mentioned before, if they miss their dividend or they suspend it, they don't actually have to pay it for the preferred.
They can just pick it up whenever they pick it up. But I'm not actually that worried about that with over- A billion dollars in cash. The billion dollars in cash and the fact they're only paying out 15% of the dividend.
They have a lot of revenue coming in. And I should mention, just like last week's podcast, this is right now. These are the best preferred right now based on valuations and all the metrics.
These aren't the best ones, but these are the best ones right now. Which, if you're in stocks and stuff and in the market, you know everything is flux. OZKAP is probably one of the better ones out there.
I just never got into it because 6% yield. You want better. I do want better.
Okay. That's number one. Banger.
Banger right off the start. Number two is AFGE. Listeners to this podcast know that we actually have AFG in her mom's retirement account.
AFGE is a preferred of AFG. So it's pretty banger. And I'll explain why and when we get through the numbers here, why I didn't actually buy the preferred versus the actual common shares here in a second.
Currently, AFGE is at a 20% discount and it trades at $20.09. The current yield is 5.57 and it pays 28 cents per share quarterly. Very awesome way to actually own a piece of an expensive insurance stock and buy expensive. AFG trades at $130 per share.
That's really high. That's one of the higher ones that we actually are in. But I'll explain why here in a minute.
I promise you. AFG has a BBB minus credit rating as well. So again, good floor.
It's not below that. It's in the range. Okay.
AFG has a market cap of $10.8 billion and trades at $130.19. So you see that there's a huge disparity between the cost of one share of AFG versus one share of the preferred AFGE. Yeah, that's big. And AFG only yields 2.5. So why did I actually... This is when you start doing more research beyond the easy stuff that people do.
You'll see why. Yeah, because you can get five shares of the preferred for one share. You can get twice as much yield.
The difference is AFG throws off a special dividend every year anywhere between $1 and $10. So I'm willing to take less yield knowing that at some point in a 12-month rolling cycle, they're going to throw off a huge special dividend. And we got AFG at like $80.
So we're up a shit ton in capital appreciation. So it was all about the valuation of AFG at that point in time when I was looking at these two and the fact that it throws off a special dividend all the time. Special dividends, I don't know if we ever touched on it.
They're very seldom reported if you just pull up like a CSNBC or if you pull up Yahoo Finance or even if you pull up like Schwab or Vanguard and you just look at the dividend yield, nine times out of 10 special dividends aren't included in that. So how do you find stocks that are not meeting your normal metrics? Because if you are searching by yield, like this will come up as a low yield and you'd be like, eh, how do you find out about the special dividends? You have to do a little more research. But why would you even be prompted to do more research? Because I liked the insurance sector.
And I looked at preferreds and I saw that, okay, when I looked at preferreds, I was like, because 5.57, that is pretty much the bare minimum I would do for a yield in this. But I saw that the AFG, which I had been researching from the insurance area, actually had a preferred. And then I went, then I did a deeper dive into AFG.
And I looked at a few, in Schwab, if you click on the dividends tab, it'll pull up a list of all their dividends for the past year. And then you can click the fall, I think it goes up to 10 years, and you can click into it and you can look at all their dividends they issued in the last 10 years. I do that to make sure the dividend is growing.
But when I did that, I saw that there was a couple of years they threw off two or three special dividends of like $2. I was like, well, then this yield that Schwab is presenting is not accurate at all. Yeah, that's interesting.
So that's a big, I would say hidden gem or like a hack, I guess. That's one thing if you want to, like, I try to bring it up when I see something that's noteworthy in the emails, like, OK, well, this is because like, for example, everyone like one of the ones that a lot of people like is ECC. ECC issues a special dividend of two cents every month.
So their actual yield incorporates that. So whenever you go in, it's consistent, it's consistent, special dividend. Same with Hercules Capital.
They throw a six cent or no, eight cent, eight cent special dividend every month. So they have like a consistent special dividend and the yield actually covers that. If it's a variable or in like it's there's no not consistent consistency whatsoever.
Generally, it's not part of the yield. So you have to do your own math. And that makes that makes sense from an actual like reporting standpoint for like an overview.
But what's interesting is so you do have to do a lot more work to find these. I'm assuming there's no thing in a screener to pull up special dividend. No.
So this is one of those weird black hole areas that like nobody's going to talk about because it's not easy to find. These are the ones you're going to stumble on. And Tim's being gracious enough to give you guys that information so you don't have to do all that work.
Well, how I first stumbled upon special dividend was I got I signed up for I it's market investor, something like that. And they actually sent out. I don't know the exact thing.
I just know that they send me out a monthly special dividend link. And I can see all of those ones. Sometimes it's weekly, depending on the number of special dividends.
Sometimes it's monthly, but they will send out an email saying, well, here's the special dividends for next month or the next two weeks. And I'm like, oh, that one looks cool. I should research that more because as I found out, they're not actually included in the yield.
So there's companies there's plenty of companies I looked at. I'm like, I'm not too keen on like a six percent yield. But when I see that they're throwing off, I say a ten dollar special dividend that might be worth investing in because you're getting, you know, one hundred and eighty percent dividend on top of their regular dividend.
So that answers my question, because I was wondering how the heck these even get on the watch list, if not into the actual portfolio. And that makes so much sense that like somebody specializes in that area. And we're just kind of like taking their information in and, you know, further improving our strategy.
That's what I like. We've mentioned and we we had a podcast where we talked about like my subscriptions, research tools and subscriptions. And like I have hundreds of I have hundreds of them.
Yeah. So I get information coming in all the time. And like I pull out the pertinent stuff and the other stuff I could care less about.
So I'm just like delete. But like I have a lot of information coming in. I try to condense it all in a way that's easy.
And that's why I have the email that we have that goes out every week, because like Hercules Capital goes ex-dividend on, I think, the 13th and it has a special dividend of eight cents. But I actually just wrapped it all up together as a sixty fifty four cent dividend or whatever it is. Well, and it's like everything else.
Everybody has a specialty and like you're going to be blind to certain areas are not as good. And that's where like taking other people's information and incorporating it into your own like makes you better, makes you a better investor, makes you a better researcher, makes you a better everything. Yeah, I know.
I know. Dividend stock or something like that. Dotcom actually tell you that every time there's a dividend announcement that comes out, it'll tell you.
And on investing dotcom, there's something called a dividends calendar. And I pull this up every week when I'm making the top 10 investments going to exit the following week. And they actually will have the special dividends on there.
So I have three different ways to get the special dividend information. It's easier when I get the email, but like I don't always get the email and that investing dotcom one's actually pretty key because if you do the dividends calendar, you can pick what week you want to or what month like you pick you pick your parameters and then it'll come up. It'll pop a chart like a big long list of what's going dividend during your parameters.
And if you look through it, they'll actually say, oh, oh, it's a special dividend. So basically what I'm hearing is that you realize that special dividends are like a micro profit niche that is under covered in what I use them for, like in the email. And when I talk to people as I use special dividends as a chance to actually enter, initiate a position because it's not really special dividends generally don't have the problem that when they go ex div, they have, like say a company has a special dividend of $4 coming off.
Generally speaking, the stock's not going to go down $4 because there's not really an ex-dividend date, even though there is. Does that make sense? Oh, that's actually really interesting. So we talked about that and the whole reason we do in the email subscription and we do where the top 10 stocks go on ex div the next week, that's not necessarily to buy before that date.
If you know that they drop the value of the actual dividend, they pay off after that date happens. And that's one of the like for monthly, we're completely sidebar for like monthly dividends payers. You always want to buy like after it goes ex because you're getting a discount.
You're getting a discount, you're getting it at a better price and it's a consistent like clockwork thing. So if these special dividends don't do that and you can get into them at a good time, like that chart that we do is basically so we can help you time things better to get the most profit and best price for your investing strategy from what we're explaining. What I found is the ones that actually pay a consistent special dividend, they go down by that much on that.
So like because they lump it together with their regular dividend. So it'll be like that makes sense. Hercules Capital will have their normal dividend plus their eight cent dividend and then it'll go down by those combined.
But the ones that throw off like a special one here and there, the ex dividend date really doesn't affect the price as much. So I actually like the chance to get say AFG at like a pretty good discount, but then it doesn't actually include in the huge four dollar dividend. But it is there.
If you want more research on this, you have to let us know because this is a complete like topic that we probably could do a whole podcast on how to locate them, how to identify if it's worth taking your time to buy a stock that's thrown off a special dividend. But generally speaking, they don't throw off special dividends unless they have extra cash. So a special dividend is a good thing to know because it'll actually tell you if a company that you're invested in or a company that you're thinking about investing in has the free capital on hand.
It's like a Christmas present. It is. So where was I? Oh, okay.
All that sidebar aside, AFG, back to AFG. Sorry guys. Has a price earning of 1188, which is ridiculously low.
I think like the pure average is like in the upper 30s. I think it's 38, 39, something like that. And it has an EPS of $10.05 per share, which is ridiculous.
Remember we said that, what'd you say, Amazon and stuff is like two. That's absurd. $10 per share they're making.
That's crazy. Their margins are not that great. They're only 11.21 net profit margin in quarter three, but that's still positive.
So that's still, I guess I win. I don't know. They've only reduced their debt by 25 since the virus hit, but that makes sense because they, prices of insurance has gone up.
So the fact their debts went down 25% is actually quite surprising. Yeah. That's actually pretty good when you put that in that light.
So their debt went from 1.96 to 1.47 billion. The reason I bring that up in the specifics where I didn't previously is because they're like, I wanted to show you something that's actually, I've never showed you before. If you look at their debt at 1.96 in 2023 and their revenue was at 7.7. So that means you'll see the, it's what the hell is they call it? They call it like interest payment versus revenue or something like that.
But to simplify it for you is just look at their current revenue and that came in 7.7, their current debt, 1.9. You want this debt to be like at least 50% less at the very minimum, 50% less than the profit coming in, especially in the area of preferred shares, because. That means they're really far leveraged, which again, if you translate it to what credit cards, say you have a lot of debt in credit cards that puts a lot of strain on your earning and your life and then your business suffers. Yeah.
Put that in actual practical application. Yeah. Common sense guys.
So they've reduced their debt by 25%. They've increased their revenue by 34%. So that's they're heading in the right way.
Heck yeah. If they paid more 2.5%, I literally would tell people buy AFG every time it dips, like, cause it has some volatility to it where it drops below like $115. Like every time below $115, pick up a couple of shares.
But I know a lot of people don't want to like tie up a lot of their capital and something that's only yielding 2.5% for like a hundred and some dollars per share. So I don't really recommend this as much, but if you have a pretty substantial size retirement, perfect retirement stock, that's why it's in her mom's retirement. And not ours.
Yeah. And AFG has a 64% dividend payout rate, which is a lot higher than the Ozark one, but it's not that bad because most of the quote experts, they like payout ratios of under 80% or so. I know some have like a more stringent, like they'll say 75 or 65 or whatever, but generally speaking, 80% would be like as high as you want to go for like non-REIT, non-BDC type of investments.
So it's below that threshold. REITs and BDCs actually have a different payout ratio because they have to pay out money based on the law. So AFGE has a call date of 9-15-2025.
So again, almost another year of collecting the 5.57. But that's $5 undervalued right now. And it's not convertible. Although in this case, I probably wouldn't care.
I wouldn't care about a convertible. Again, this one's not cumulative, but overall, just looking at all the finances and all the margins and everything, I don't think AFG is going to have any problem paying their dividend payouts for their preferred. Yeah.
Especially if they're throwing off all those specials. Yeah. So AFGE and OZKAP, both really good.
Now we're going to get into the riskier area. But I think there's a lot of risky ones. So I went through probably, I want to say 250 preferreds.
Just for this episode, guys. These have a lot of risk associated with them, but you'll see why I like them. Okay.
The first is BPYPO. That's a heck of a, B-P-Y-P-O. Which currently is at a 36% discount, which is right there.
Wait, well, I figured it makes you say, hmm, I should probably look at this one a little bit more. Things that make you go, hmm. It trades at $1,609.
The more you deal with prefers, the more you'll see that there's some out there that are 70%, 80% discount, but they're trading at $5. Yeah, that's true. If the freaking preferred's a penny stock, you probably want to avoid it.
I remember penny stocks are like $5 and below. So I'm just saying. Trades at $1,609.
The current yield is $9.91 for a preferred, which that's really high for a preferred. And it pays $0.40 a share quarterly. Brookfield Group, or BN, is the issuing company.
And they have a huge worldwide asset management thing going on. Where the heck did B-P-Y-P-O come from? I don't know. Way to be consistent, guys.
BN has a market cap of $89 billion. It's a huge, huge, huge, almost large cap. I think a large cap starts at $100 billion or something like that.
And BN trades at $5,404. So again, you're getting quite a- Yeah, that's a big difference. A difference.
Now where this is kind of shit is it has a B debt rating. So it's technically a junk bond. They're in junk bond status.
That might be why they're actually issuing more preferreds because I can't find a BN bond. So I think they know that they have shit for debt rating. So they're going to issue preferreds.
Interesting. Well, there's a loophole-y type deal. I'm learning something today.
Cool. BN only yields 0.60% dividend. So they don't pay out crap.
So obviously this 9.91 is an easy decision. But let's check out. BN has a P-E of 1483 and an EPS of only 0.61. So that like- Why is that? That's really low.
After the first two where you have those bangers, you have this one at $0.61. And its profit margins are weaker as well. Their net profit margin in quarter three was 3.59. And the reason that I actually have- I looked at BN years ago. They've cut their dividend, but their dividend used to be higher.
But the reason I would never own them is their debt's ridiculous. I had to like triple check this and do my math and everything. Their current debt sits at $188.3 billion.
Holy shit. So I can't even justify a good reason to own- What's their revenue? The revenue has increased 53% from the virus through now to $95.9 billion. So again, like I mentioned before, you want that debt- Two years.
To be like half of the revenue, not the revenue to be half of the debt. Yeah, right. So- Now that would be justified if they did something specific to try to improve growth, but yeah.
Okay. And this is- That's a red flag. This is the first one that we've addressed.
They actually are calling- It's past their callback date. So it's callable at any point from here on. They can say, we're taking all our preferreds off the market at the $25.
Yeah, they're not going to do that. But that's 36% down. And what will happen is that 36% should shrink.
So you're getting a 10% yield while the discount shrinks because they ultimately always shrink. Well, a decent company, like there's crap companies that their gap doesn't shrink, but this is a pretty good company. They just have a lot of debt.
The debt thing makes kind of sense if you look at like they're in the assets, which is the capital market, which is like the BDC. So it costs them a lot more to borrow money because the interest rates are higher. So it makes sense.
So they'll probably refinance that debt. So I fully expect that debt to be closer to 100% of their revenue at 95. So probably a hundred billion, I think within the next couple of years.
I'd be curious to check in on this one later, just to see what the heck it does. But we actually hold QRTEP, which is another preferred that has similar metrics. And they haven't missed a payment yet.
And I don't mind the high risk because you are getting 10% for a company that is making a hundred billion in profit. So if that, if they weren't making a hundred billion in profits, say they were only making a couple billion in profit and they still had like two to one debt, I wouldn't think it as nicely as I do this one, because the risk here for me is actually worth it's worth it. Yeah.
And what's the rule of thumb for businesses? I think it's like, if you, if your income and your profit or whatever can pay off within three years of the debt, like most companies are profitable in a three-year period, basically. So the fact that that debt is possible to be paid off based on those numbers, this one's still risky, but it's actually makes sense. But just like regular stocks, regular bonds, regular anything.
If you going into a risky adventure, you want to actually mitigate the risk by only putting so much into your risky investments and putting the rest into the better investments. So like if you did say a third into the BPYPO, a third into AFGE and a third into OZKAP, you'd be bad. That'd be a banging preferred portfolio.
21.6, you'd be making about eight, seven and a half, 8% on your preferred portfolio positions, which would be really good. And one of the things I looked and looked and looked for data on the number of companies that defaulted on prefers. And like, it's so minuscule.
It's a lot like bonds. Like we get this, we get this hitting the beat into our head that like junk bond, junk bond, junk bond, they're bad, high risk. But if you look at actual or high yield, high risk, you actually look at the default rates of junk bonds, which is technically what BN has as their credit rating.
It's like less than 2%. So if you look at any of the successful like investors and all that stuff, one of the overarching themes is basically your risk to reward ratio. They talk about having a five to one or a one to five, whatever.
I forget which way the ratio goes. But basically if the risk is 2%, it has to pay out five times that for like the big wigs to essentially take that risk on. Yeah.
So that's the third one. I put the fourth one on there because I know that a lot of people wouldn't feel comfortable with the third one because it is high risk. I put in one that's not as – Well, especially when you have QRTEP as like a contender that's very similar to it.
Why would you pick the B-P-Y-O-P-P-O? Because the BN is a way better company than the company that issues QRTEP. So do we have any of it? No. Why not? QRTEP is paying us like 20 some percent.
Oh, so you see my point. Well, I have my question. What if you look at our overall portfolio, QRTEP I actually have is it's like I think 1.5% of my portfolio.
I've actually mitigated the risk by spreading it around. Okay. So if you had extra cash right now specifically allocated for like a risky preferred, would you put it into that one? Yes.
There you go. So our biggest problem is the fact that we don't have enough cash. We have to make – I have to make tough decisions all the time because we only have a $100,000 portfolio.
I know a lot of people have less value in their portfolio and I have it all tied up into stuff. And we're not contributing extra every month. So it's only based on the dividends that we get in.
So what I do is I like – I based on valuations and I'll have like 2,000 of my bullet share which I could in theory transfer over to a – that preferred but I have my bullet share because I really believe like the next two or three weeks are going to be crazy volatile and I'll be able to pick up shares of something that I like more than asset management. I have like if you look at what they specialize in. We already have that covered.
I have Trinity Capital. I have Hercules Capital. I have assets already covered.
So I don't really need a – So right here is our diversification and allocation percent or like thought process in real time. Like this is what we go through on a regular basis. That's how we don't put all our eggs in one basket.
That's how we hedge our risk. So now I would probably put it into the number four one here. But I'm waiting to see what happens with the election before I do that.
And the reason like I say that is like politics and the stock market shouldn't mesh up and they seldom do. But they do. There are certain areas that they will and you will see why here in a second.
The last one is BEP slash PRA. It's BEP. They're A preferred.
In Schwab, it's labeled BEP slash PRA. In say Vanguard, it's BEP dot PRA. Like all depends on your brokerage how they list the preferred.
But this BEP PRA is trading at 20% discount at $20.01. Its current yield is 6.55 and it pays 33 cents per share quarterly. The issuing company is BEP which has a BBB minus credit rating. So it's again floor.
It's a renewable energy generation and it has facilities across the world. So like you see why like normally I don't mix politics with investing, but renewable energy seems to be an area where there's one party that's more interested in renewable energy than the other one. So like this is one where politics actually are encroaching on my investment.
So I'm holding off to see what happens. If like say like the Republicans win the White House and win the Congress, this 20.01 is going to fall to who knows what. So I might be able to get this at a way better price just waiting for like a political news to hit the fan.
So that's why I'm waiting on this one. BEP's market cap is 7.2 billion and it trades at 2521. So this one's right around it's preferred and it yields.
So BEP itself yields 5.63 which again that's where you have to make the determination. Do you want 5.63 for the common share at 25 or do you want 6.5 at right now $20? Like that's you have to figure out like and with BEP I would probably do the preferred because I have more risk mitigation because of the way they pay out prefers as opposed to regular dividends. There is a chance that if the Republicans sweep everything that they would have to suspend their dividend.
If they suspend their dividend you're not getting in it. Yeah. So the price earnings for BEP is 112.36 which is another reason why the preferred is better.
It's like like I mentioned before like the price to earnings and the profit margins don't really matter as much with prefers. It's another like caveat to them as long as the issuing company is making money and can pay down their debt how much like what their PE is and how much profit margin they have left at the end of the quarter doesn't really matter as much. But that 112 is super high and their EPS is negative 0.60 which is another huge red flag why you don't invest in BEP.
It does have a net profit margin of 2.43 percent and it currently has about 30.5 billion in debt which is a 64 percent increase over the past five years. But as you can see by the earnings per share by the price to earnings and by their debt number they've been on an acquisition spree. So like this isn't going to be this way forever like at some point all their acquisitions are actually going to contribute to revenue growth.
Yeah and that makes sense in this renewable energy realm like people are investing big in the infrastructure and whatnot to be ready for what's on the horizon. So their investments have been working as their revenues increased 30 percent the past five years but this one I fully expect BEP and actually the one YouTube channel we follow that I help with their portfolio I actually have her in this specific preferred because the what they're doing is phenomenal and their revenues are just going to like I bet you that revenue is going to increase probably 75 to 80 percent within the next two to three years just based on all their acquisitions and all the things they've been building. Tim's oracle ball there it is.
So this is why if I'm waiting to have the election before I decide if I'm actually going to get us into this one at that point. This preferred A is callable at 331 but again they're not going to call it back at a 20 percent discount so they just roll it over and it is a cumulative which is always nice again so if they suspend the dividend you're going to get your dividend at some point in the future and it's not convertible again which is nice because I want nothing to do with the actual company itself just the preferred. That is also very nice.
And as a utility there's like I'm pretty sure the probability of default for utility is like next to zero like the government will never let a utility they will actually they'll buy it up before they let it default. Especially if it's in the renewable energy sector. So that one is see again risky or then it's riskier than the first two but it's not near as risky as the third one whenever so like there's four to choose from if you don't have an appetite for risk then just would be the first two obviously if you have an appetite for risk but not full-fledged risk it would be the fourth one and the first two and if you just YOLO like I do it would be all of them.
All of them. Just put one 25 percent in each of them but that is. Oh you make me laugh.
That's the preferreds so yeah that's what I'm saying so yeah Hercules Capital's regular dividend is 40 cents and they have an eight cent special dividend every month but because it's eight cent every month they include it in the yield so. But what we were saying that 20 or that 25 percent across the four is only for the allocation of your portfolio for prefers or for specific sectors. It's not your entire portfolio.
Now when you do a screener for preferreds one of the ones to look for I know there's like probably five to ten percent of all preferreds will pay you monthly dividends those would be like preferred but those would be the preferred preferreds. But based on the valuation of those right now they weren't they weren't ideal but like if you create a watch list I would start there I would just get monthly dividend payers of preferred shares because you're going to accumulate so much cash. That's that.
All right guys. Next week I have no idea what we're talking about yet so it'll be a surprise you show. Yep it'll be a surprise.
All right. Hopefully you guys enjoy your week and I guess I should do the American patriotic thing. Go out and vote.
I already voted. I voted weeks ago. Not weeks ago.
And if you're like me I can't vote on principle because I can't tell who's lying about what so I have no substantial data to actually make an educated decision on. But no matter what you think about who's running it's like there's going to be some effect to the markets so just keep an eye for that. Like if Trump wins financial stocks will do better.
Probably defense stocks will do better. If Harris wins you're probably looking at renewable energy. I think one area that both no matter who wins is going to do well is going to be energy.
That's why I keep every time I have extra cash I keep bump jumping into my energy stocks because they've been so manipulated they're down so low that but you have to but then like you have to pay attention to external factors just for the prime example of that last one like it's a renewable energy. You have to know that who's going to actually implement more infrastructure for renewable energy before you invest in renewable energy and then be like well I don't understand why my shit's down like 70 percent. Well common sense yo.
Yeah there's always external factors. All right guys we will see you next week. Next week until then.