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Preferred Stocks: A Golden Opportunity You Can’t Ignore

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Do you hear that? It’s the sound of opportunity knocking in the world of preferred stocks. These financial instruments are like prized possessions in today’s market – striking the perfect balance between manageable risk, attractive prices, and promising price appreciation, all while offering substantial dividends. What makes them so special, you ask? Well, they’re a rare fusion of bonds and equities, providing an equity interest in a company with stable income generation. Now, that’s something to sit up and take notice of, isn’t it?

Preferred stocks come in various flavors, each with its own unique characteristics and potential. Take “Term preferreds,” for example. They are akin to bonds, offering a steady yield until they mature at par value. When these gems are trading below par value, they’re nothing short of a steal. And then there are “Perpetual preferreds” – a perpetual promise of income that can be redeemed by the issuer. When interest rates drop, there’s potential to sell these off at a gain. Sounds sweet, right? Last but not least, “Convertible preferreds” can be exchanged for common stock according to the terms specified. In the meantime, they serve as a reliable income source with a price often tied to the fortune of the issuer.

Most preferred securities have a liquidation value of $25, but since they’re traded on the stock exchange, their daily price can jiggle and wiggle due to a plethora of factors including their security type. But that’s not all – these stocks offer higher yields compared to common dividend stocks or bonds from the same issuer. Talk about bang for your buck! Plus, they come with the added perk of sitting at the top of the dividend payment hierarchy, safeguarding investors from common dividend cuts during financial rough patches. Now, if that’s not a sure bet, what is?

Pick #1: TDS Preferred – Up To 10.4% Yields

Telephone and Data Systems, Inc. (TDS) – an intriguing Fortune 1000 company that holds 84% of US Cellular (USM), the fourth-largest wireless carrier in the United States. It’s like having a hidden treasure begging to be unleashed, isn’t it?

For years, TDS has been in the hot seat due to pressure from activist investors to sell USM and do right by its shareholders. Recently, the company announced a strategic review for determining the fate of USM, incurring certain expenses in the process. While a positive outcome could spell good news for TDS and USM shareholders, our focus as income investors lies elsewhere. Beyond its USM ownership, TDS offers a range of broadband, video, and voice communication services to different customers – talk about being a jack of all trades, right?

During Q3, TDS made moves by deploying fiber to over 61K service addresses and upping their FY 2023 goal to reach 200K – a true testament to their ambition and expansion plans. They’re all about fostering connectivity, even looking to reel in $90 million annually from the federal ACAM program to expand broadband connectivity across the country. These folks are in it for the long haul, aren’t they?

Now, let’s talk finances. TDS has had its eyes set on increasing free cash flow, and their quarter results speak volumes. They generated $207 million in adj. EBITDA for nine months of FY 2023 while managing their obligations effectively. TDS preferreds are undeniably attractive, with TDS-V offering a whopping 10.4% yield and a wheelbarrow full of potential waiting to be unlocked. So, despite the market’s somber outlook, there’s every reason to stay firmly planted on the TDS preferred train, especially with the promise of big value unlocks in the horizon.

Pick #2: XOMA Preferred – Up To 9.4% Yields

XOMA Corporation (XOMA) – a biotech royalty aggregator with a laser focus on early- to mid-stage clinical assets. They’re in the business of monetizing and aggregating royalty payment rights associated with pre-commercial drug candidates, operating with a lean team and utilizing seasoned executives – it’s like having a golden touch when it comes to clinical royalty, don’t you think? (XOMA) – a biotech royalty aggregator with a laser focus on early- to mid-stage clinical assets. They’re in the business of monetizing and aggregating royalty payment rights associated with pre-commercial drug candidates, operating with a lean team and utilizing seasoned executives – it’s like having a golden touch when it comes to clinical royalty, don’t you think?

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