If there is any good that came out from the massive stock market correction last year, it’s the dividend yields of preferred stocks that increased to historic highs.
Preferred stocks, which work like debt and equity at the same time, pay fixed dividends annually, similar to a bond paying interest income to the holder.
When the market price of a preferred stock falls, the cost to invest the stock becomes cheaper, thereby raising the effective dividend yield.
Last year, the median dividend yield of preferred stocks reached as high as 6.6 percent. This was higher than the yield of six percent in 2016 and 5.2 percent in 2015.
It has started to correct this year, however, to a median 6.4 percent as share prices of preferred stocks recovered on lower interest rate and inflation outlook.
Still, the dividend yields still look historically attractive although comparable interest rates from long-term fixed income instruments are now offering between six to seven percent.
But perhaps not many are aware that preferred stocks also enjoy a certain tax advantage over fixed income.
The interest income that you get from bonds, for example, is normally charged with a final tax of 20 percent while dividends from preferred stocks are taxed only 10 percent.
Moreover, because preferred stocks are traded, you can invest as low as Php10,000 and make your buy and sell decisions easily on a real-time basis whereas in bonds, you need to meet a minimum investment amount and have to go through brokers where execution may take longer than 24 hours.
Before you buy preferred stocks, bear in mind that in times of financial distress, company issuers may delay payments of dividends. There is a risk that you may have to wait for your promised dividends indefinitely in case the financial situation worsens.
So it is important that you make sure that the company is financially capable of paying its dividends on time. You can do this by reviewing its profitability and financial performance.
Always ask yourself: what is the probability that the company will fulfill its promise to pay dividends consistently? Can it generate enough cash flow to cover the projected dividends aside from the existing interest expenses?
There are only 30 active preferred stocks in the Philippine Stock Exchange. Let’s review and update the top five preferred stocks in the market that currently pay at least seven percent:
1. Leisure and Resorts World (PSE: LRP)
Div Yield: 8.30 percent
Leisure and Resorts World is the leading retail gaming company in the Philippines that provides multi-gaming platforms and products. The company operates professional bingo games with a 35-percent market share. It also operates online gaming as well as casino and property ventures.
Net income of the company has grown from Php323 million in 2013 to Php1 billion in 2016. But in 2017, the company reported lower net income at Php430 million due to a slowdown in revenues and higher costs.
Last year, the company also reported lower nine-month income at Php266 million, 26 percent less than the same period in 2017. As of September 2018, the company had negative working capital of Php2.5 billion with a current ratio of 0.47 only.
To boost its cash reserves, the company sold shares in private placement last week to raise about Php4.3 billion which will improve its liquidity position this year.
The preferred stock pays 8.5 percent or Php0.085 fixed dividend every year. The company has been paying dividends consistently for the past three years. At the current market price of the preferred stock, the dividend yield stands at 8.3 percent.
2. San Miguel Corporation (PSE:SMC2C)
Div Yield: 7.80 percent
San Miguel Corporation (SMC) is the largest publicly listed food, beverage and packaging company in Southeast Asia.
SMC has ventured beyond its flagship product, San Miguel Beer, one of the top-selling beer brands in the world, to other industries such as fuel and oil, power generation and infrastructure.
Last year, SMC raised over Php40 billion from the follow-on offering of its subsidiary, San Miguel Food and Beverage. It reported a slightly lower nine-month income last year at Php19.8 billion compared to Php20.9 billion the previous year on high sales growth, which increased by 27 percent.
The company has eight series of preferred shares listed in the market. SMC2C currently has the highest dividend yield with 7.8 percent in the group. This is followed by SMC2B with a yield of 7.6 percent, SMC2F at 6.8 percent, SMC2G at 6.8 percent, SMC2H at 6.4 percent, SMC2I at 6.5 percent, SMC2D at 6.0 percent and SMC2E at 6.5 percent.
3. Phoenix Petroleum (PSE:PNX3B)
Div Yield: 7.70 percent
Phoenix Petroleum is engaged in the trading of refined petroleum products on wholesale and retail basis. It also operates gas stations, oil depots, storage facilities and allied services.
The company also distributes lubricants and chemicals under its own brand. Last year, the company reported a nine-month income of Php1.3 billion, eight percent lower from Php1.4 billion in 2017 on higher operating costs as total revenues almost doubled to Php64 billion.
The company has two series of preferred shares in the market, PNX3A and PNX3B. PNX3A pays a fixed dividend of Php1.857 per share every quarter or Php7.428 annually. At current share price of the stock, the dividend yield stands at 7.4 percent.
PNX3B, on the other hand, pays Php2.027 per share quarterly or Php8.108 annually. The dividend yield of the stock at the current price is 7.7 percent.
4. First Gen Corporation (PSE:FGENG)
Div Yield: 7.40 percent
First Gen is one of the largest independent power producers in the Philippines. The company owns power plants that utilize natural gas, geothermal, wind, hydro and solar power.
Last year, First Gen reported a nine-month net income of Php8.1 billion, a 59-percent increase from Php5.1 billion in 2017 on the back of 23-percent growth in revenues, which increased to Php78 billion.
The company has two series of preferred shares. FGENF pays a fixed dividend of Php4 semi-annually and currently has a dividend yield of 7.40 percent. The other one is FGENG, which pays a fixed dividend of Php3.89 semi-annually.
The company has fully redeemed FGENG series with only FGENF as the remaining listed preferred share in the market.
5. Megawide Construction (PSE:MWP)
Div Yield: 7.1 percent
Megawide Construction Corporation is primarily engaged in general construction that employs advanced technology building systems such as pre-cast concrete and formwork systems in its projects.
The company last year earned a nine-month income of Php1.32 billion, five percent lower from Php1.38 billion the previous year on lower total revenues at Php12.7 billion, which fell by 11 percent.
The company’s preferred shares promise to pay 7.025 percent per year or Php1.75625 per share quarterly. At the current price of the preferred stock which is slightly lower than par value of Php100, the dividend yield of MWP stands at 7.1 percent.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888