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Investing For Retirement: Preferred Shares Are Excellent (Part 2)


Preferred shares suffer from poor liquidity but often have fairly reasonable price stability.

The critical aspect is assessing the quality of the underlying business because this is still a subordinate claim on future cash flows.

I see the triple net lease REIT space as a very interesting area for analyzing preferred shares.

I bought some shares of GOODO and have been pleased with the performance.

In my last piece on selecting preferred shares, I introduced the preferred shares for several triple net lease REITs:

I opted to analyze the preferred shares for triple net lease REITs because I am comfortable analyzing the underlying business and I believe the quality of the business remains absolutely critical to analyzing the preferred shares.

Importance of Underlying Business

I don't want to invest in preferred shares on the basis of the discount to liquidation value (or call value). I have no interest in buying shares in an "investment" that will fail to pay their dividends. Investors who believe the liquidation value provides some absolute guarantee that they will recovery their money are fooling themselves. There are plenty of preferred shares in other sectors that trade at fairly small percentages of their "liquidation value" because investors recognize that they are unlikely to receive anything near the par value.

However, I also don't want to pay any material premium to call value if the shares could be called immediately and the accrued dividend (usually due on call) would not cover the difference.

The Preferred Shares

The preferred shares for these REITs are demonstrated in the chart below:

When I was writing the first article several weeks ago, I also recorded values for the prices on these preferred shares and built the same table. I colored the older one yellow to make it easier for readers to tell them apart:

If investors are trying to compare the values in the table directly they might think the data was messed up because the prices on several shares are precisely the same. While these preferred shares can struggle with weak liquidity, they often have fairly stable prices that reward an investor if they are patient and able to enter near the bottom of the normal range.

For investors that want to see the price difference across each share, I'm providing another table. To make it simple, I've kept the...