R. Eric Chadwick, CFA, is a Portfolio Manager and President of Flaherty & Crumrine Incorporated where he has managed preferred securities since 1999. Mr. Chadwick is optimistic about the returns to investors from bank preferred: “…the largest names that issue preferreds are some of the largest banks in the country, such as Bank of America (NYSE:BAC) or Citigroup (NYSE:C), or Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) on the broker/dealer side. Names of this nature have offered us very good yields combined with healthy balance sheets and limited credit risk. Foreign banks are taking similar steps to improve credit profiles, but they are probably two to three years behind in terms of progress.”
Mr. Chadwick also points out the advantages of the qualified dividend income eligible preferred stocks in this exclusive interview with the Wall Street Transcript:
“The other trend I would highlight is continued focus on QDI, which is qualified dividend income. Issuance of QDI-eligible preferreds has been increasing materially, and the percentage of the market that is QDI-eligible has been increasing overall. Accordingly, distributions from our funds have also been increasingly QDI-eligible. In recent years, our closed-end fund distributions have been in excess of 70% QDI-eligible. In the open-end fund, it has been up over 90% QDI-eligible.
The pickup in after-tax yield for QDI is very material and something that I think still isn’t fully appreciated. QDI distributions are reported annually to investors on Form 1099, with Box B separating out QDI-eligible dividends from regular dividends. To give you an example, if you use the highest tax bracket, a 5.8% pretax yield on a QDI preferred is a taxable-equivalent yield of 7.7%. This has been a very positive development in our market.”