The Intelligent REIT Investor Guide

CHAPTER 13REIT Preferred Stocks: (Contributed by Jay Hatfield)

“The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.”

—Benjamin Graham

The legendary value investor Benjamin Graham was not a fan of preferred stock. As he once said, “Really good preferred stocks can and do exist, but they are good in spite of their investment form, which is an inherently bad one.”

Graham felt as though “the typical preferred shareholder is dependent for his safety on the ability and desire of the company to pay dividends on its common stock.” He believed that “preferred stock carries no share in the company's profits beyond the fixed dividend rate. Thus, the preferred holder lacks both the legal claim of the bondholder (or creditor) and the profit possibilities of a common shareholder (or partner).”

I can see why Graham was no fan since he was the quintessential value investor; he believed that they “be bought on a bargain basis or not at all.” However, here I'll have to disagree with him. The way I see it, preferred stock is an attractive asset class that generally offers relatively high yields. On top of that, it provides the protection of a fixed dividend and seniority over common stock both with regard to dividends and in liquidation. Preferreds occupy a unique space between debt and equity, displaying certain attributes of both bonds and common stock at the same time.

Most of these ...