The Almost Perfect Income Stock

Income investors are always searching for the perfect investment. Although such an investment may not exist, there may be investments that are close. One type of stock that you don’t hear much about is the Adjustable Rate Preferred Stock or ARPS, also known as a Floating Rate Preferred Stock or FRPS.

First, let’s look at what a preferred stock is. It is an income paying stock, usually issued for $25 per share, which pays out a set dividend. The preferreds have no growth potential, unless they are convertible into common stock. If a company goes out of business, the bonds are paid off first, then the preferred stockholders, and then if there is anything left, the common stockholders.

The ARPS have other benefits over the regular preferreds. If interest rates in general go up, the rate on the preferred also goes up. The payout rate is generally based on the three-month LIBOR rate plus a specific percentage amount. LIBOR is the London Interbank Offered Rate, which is based on interest rates at which banks borrow unsecured funds from each other in the London wholesale money market, and is published by the British Bankers’ Association on a daily basis. The three-month LIBOR is currently 0.26%.

Many of these ARPS preferreds even have minimum interest rate payouts, below which the rates won’t drop. So if rates drop, the investor will also be protected on the downside, with the interest rate floor. Some of the ARPS are fixed-to-float preferreds, which means that the interest rates are fixed for a period of years, then floating after a particular date.

In addition, most of these preferreds are eligible to receive the beneficial 15% tax rate, after the required holding period.

WallStreetNewsNetwork.com has developed a list of almost 20 of these Adjustable Rate Preferred Stocks in the form of an Excel spreadsheet, which can be downloaded, sorted, and changed. The database contains extensive information including the company, the Yahoo Finance symbol, the Standard & Poor’s stock symbol, the par value (call price), minimum interest rate, the floating rate calculation, the maximum rate if any, the first call date, the current yield, and whether the dividend is cumulative or non-cumulative.

Cumulative means that if the company runs into financial difficulty and is unable to make payments for a while, the unpaid back dividends on the preferreds must be caught up and paid to the preferred shareholders before any payments can be made to the common shareholders. Non-cumulative means that the dividends do not accrue.

Many of these ARPS have call features, which means that on a particular date, the issuer has the right to buy back the preferred stock at the call price, usually $25 per share.

The ARPS preferreds will fluctuate but because of the variable rate feature, they shouldn’t fluctuate as much as regular preferreds. But these fluctuations can create opportunities, as many of the ARPS are trading below their $25 par value issue price.

An example would be the Goldman Sachs Series C Preferred (GS-PC), which was issued at 25 per share, and is currently trading below 24. Please note that the Yahoo Finance stock symbol is shown, which may be different from the ticker your brokerage firm uses. (The S&P symbol would be GS-C