Let's take a look at preferred stock bargains

Although they trade like stocks, preferreds are more like bonds. Normally you buy them for the steady dividends.

When a company issues a preferred stock, it sets the annual dividend and sells the shares at a preset price, typically $25. Most preferreds are “callable,” meaning that the issuer has the right to call (redeem) them at the “call price,” normally the issue price, after a specified date (call date), typically five-years after issue. Consequently, $25 preferreds trading above $26 usually trade back down to the $25 to $26 range as the call date approaches.

Preferred stock risk

The main risk of holding preferreds is that the preferred issuer runs short of the cash needed to pay the specified dividends. You can minimize that risk by sticking with preferreds rated at “investment quality” by a major rating agency. I typically use Standard & Poor's (S&P). S&P's investment quality ratings, starting with the lowest risk are AAA, AA, BBB+, BBB and BBB-.

Recent price action

In normal times, since they pay relatively high dividends, preferred stocks issued at $25 per share typically trade up to the $26 to $28 range. But last year was anything but normal and for most of the year, $25 preferreds traded in $16 to $22 per share range.

Then, starting in November, most preferreds backed by solid fundamentals gradually traded back up to the $25 to $26 range, which is where most are currently trading. However, there are still some exceptions. For instance, I recently found three investment-grade preferreds trading at less than $24 per share, in fact one recently traded at $17.09.

Underpriced investment grade preferreds

Here are three underpriced preferreds. All were issued at $25 per share. The coupon rate is the interest rate based on the issue price. The market yield is the actual yield you'd receive based on the recent trading price. Upside potential is the capital appreciation you would realize if the preferred trades up to its $25 issue price.

• Brookfield Renewable Partners (ticker: BEP-PA): recent price $17.64, coupon 5.25%, market yield 7.4%, +42% upside potential. Issued by Brookfield Renewable Partners (ticker BEP). S&P Credit Rating BBB-.

• Entergy New Orleans Mortgage Bonds (ENO): $23.67, coupon 5.50%, market yield 5.8%, +11% upside. Issued by Entergy (ETR). Credit Rating BBB.

• PartnerRe Series J (PRE-PJ): $20.32, coupon 4.88%, market yield 6.0%, +23% upside. Issued by PartnerRe (https://partnerre.com).

Preferred stock ticker symbols are not standardized. The listed ticker symbols work on Yahoo. Use your brokers' lookup function to find the ticker symbol used there.

As usual, those are my ideas. Do your own research. The more you know about a pick, the better your results.

Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting. com or Santa Cruz Sentinel, 318 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/ topic/Harry_Domash.