When investors think of shipping they usually focus on equities and their volatility. The key issues in their minds are contango for tankers and Vale’s production of iron ore for dry bulk. Timing is critical in the short term, as well as assessing whether the good or bad news is priced into the stocks. But there is a group of public securities that are both inexpensive and where one is paid to wait – shipping preferreds.
We live in a world of suppressed interest rates by the US Federal Reserve and other central banks, where as of this blog post one has the choice of lending to the US Government for 5 years at 33 basis points or for 10 years at 70 basis points. I would note these returns are negative when adjusting for inflation. It is hard to preserve wealth, let alone accumulate it, paying governments to borrow money.
Luckily, the Federal Reserve’s buying activities do not include preferred stocks or baby bonds of shipping companies. One can get a market rate and then some. Every week, Capital Link in their Weekly Report publishes a list of 30+ publicly traded preferred shipping securities. The risk reward in many of these securities is compelling. They typically yield approximately 1,000 basis points over the five-year US Treasury note and approximately 500 basis points over the US High Yield ETF index. Some companies, especially tanker owners, have significantly improving balance sheets. The benefits of preferreds encompass not only the yields but also the potential for capital gains as the world normalizes. As of the time I write, all of the names in the Capital Link Weekly Report trade below par. There are of course risks, and you need to do your homework on the companies. But my most pressing complaint is that there aren’t more shipping preferred securities to choose from.
