As a finance expert, I often get asked about low-risk investments that generate steady income. Preferred stocks fit this role well. They sit between bonds and common stocks, offering higher yields than bonds and more stability than common shares. Today, I’ll analyze two outstanding preferred stocks that I believe are worth holding forever.
Why Preferred Stocks?
Preferred stocks pay fixed dividends, much like bonds pay fixed interest. However, they trade on exchanges like common stocks. This hybrid nature gives them unique advantages:
- Higher yields than bonds – Many preferreds yield 5-8%, compared to 3-5% for investment-grade bonds.
- Priority over common stock – If a company faces financial trouble, preferred shareholders get paid before common shareholders.
- Potential for capital appreciation – Some preferreds can rise in value if interest rates fall or credit conditions improve.
However, they aren’t risk-free. Unlike bonds, companies can suspend preferred dividends without defaulting. So, I focus on financially strong firms with a history of reliable payouts.
My 2 Top Picks
After extensive research, I’ve identified two preferred stocks that stand out:
- Bank of America Series L Preferred (BAC.PRL)
- AGNC Investment Corp 6.50% Series C Preferred (AGNCN)
Let’s analyze each in detail.
1. Bank of America Series L Preferred (BAC.PRL)
Bank of America is one of the largest U.S. banks, with a strong balance sheet and consistent profitability. Its Series L preferred stock (ticker: BAC.PRL) offers a compelling mix of safety and yield.
Key Features
- Dividend rate: 4.375% (fixed-to-floating)
- Par value: $25
- Credit rating: BBB (investment-grade)
- Liquidation preference: Senior to common stock
The dividend is fixed until 2025, after which it switches to a floating rate based on the three-month LIBOR + 1.94%. This structure protects against rising interest rates.
Why It’s a Forever Hold
- Strong issuer: Bank of America has a Tier 1 capital ratio of 12.6%, well above regulatory requirements.
- Attractive yield: At current prices (~$25.50), the yield is around 4.29%.
- Call protection: The stock can’t be called until 2025, reducing reinvestment risk.
Dividend Calculation Example
If you buy 100 shares at $25.50:
Annual\ Dividend = 100 \times \$25 \times 4.375\% = \$109.382. AGNC Investment Corp 6.50% Series C Preferred (AGNCN)
AGNC is a mortgage REIT (mREIT) that invests in agency-backed mortgage securities. Its Series C preferred stock (AGNCN) offers a high yield with moderate risk.
Key Features
- Dividend rate: 6.50% (fixed)
- Par value: $25
- Credit rating: BB (below investment-grade but stable)
- Liquidation preference: Senior to common stock
Why It’s a Forever Hold
- High yield: At ~$25.75, the yield is 6.31%.
- Agency-backed assets: AGNC’s portfolio consists of mortgages guaranteed by Fannie Mae and Freddie Mac, reducing credit risk.
- Strong coverage: The company’s dividend coverage ratio is solid, with earnings comfortably exceeding payouts.
Dividend Calculation Example
For 100 shares at $25.75:
Annual\ Dividend = 100 \times \$25 \times 6.50\% = \$162.50Comparing the Two Preferred Stocks
| Feature | BAC.PRL | AGNCN |
|---|---|---|
| Issuer | Bank of America | AGNC Investment |
| Dividend Rate | 4.375% | 6.50% |
| Current Yield | ~4.29% | ~6.31% |
| Credit Rating | BBB | BB |
| Call Date | 2025 | Callable anytime |
| Risk Profile | Lower risk | Moderate risk |
Risks to Consider
- Interest rate risk: Preferred stocks can fall in value if rates rise sharply.
- Credit risk: If the issuer’s financial health deteriorates, dividends may be suspended.
- Call risk: If called early, investors may have to reinvest at lower yields.
Final Thoughts
Both BAC.PRL and AGNCN offer compelling risk-adjusted returns. If you prefer safety, BAC.PRL is an excellent choice. If you seek higher income and can tolerate slightly more risk, AGNCN stands out. By holding these forever, you lock in steady income while benefiting from strong underlying businesses.
Would you like further analysis on other preferred stocks? Let me know in the comments.
