Are Ben Bernanke and the Federal Reserve Telling You to Buy Public Storage Preferred Stock?

In 2008, as the US fell into its most severe recession (or depression) since 1929, Bernanke quickly lowered the Fed Funds rate, bringing it to 0% by December. He has now held it there for over 3 years. Many have questioned his resolve, believing that the Fed will ultimately need to cause massive inflation in order to devalue the government’s debt. Yet, the Federal Reserve is doing everything possible to signal that there will be no change in current interest rate policy until at least the middle of 2013. Not only has Bernanke brought rates down and held them down, he is now telling everyone who will listen that they are going to continue to stay low for an exceedingly long period of time.

Bernanke’s goal, of course, has been to cause financial assets to move out along the risk curve, stimulating the economy. However, for those who simply cannot afford to add risk or who need cash on hand, the last three years have seen diminishing returns in savings and newly opened CD accounts. As we begin 2012, the average savings rate is below 1%, short-term CD rates are even lower, and investors are again looking for places to get a return on their cash.

In every year since 2008 there have been opportunities for those that look hard enough to gain yield without adding tremendous risk. 2009 brought high quality, high yielding municipal bonds at a discount. In 2010 and 2011 bank issued structured notes, discussed here. However, as we begin 2012, the opportunities in high yield munis are gone and most major banks have discontinued issuing structured notes or are issuing notes that are significantly less attractive.

Investors looking for yield need to look in a multitude of different directions, including adding to their exposure of high-dividend yielding Dow 30 stocks. One area that is ordinarily off limits – or should be – for most individual investors is preferred stock. As I pointed out in this BestCashCow.com article from last year, preferred stock is more like debt than stock, but unlike ordinary debt it has no maturity. If interest rates move higher, you cannot just hold it to maturity and hope to be made whole. It never matures and the traded value may never get back to par. To boot, corporations get certain tax benefits to hold the preferred stock of another corporation that individuals do not.

The biggest issuers of preferred stock have historically been major financial institutions, and the recent track record of preferred stock issued by banks has not been good to anyone but the most agile traders. In 2009, Wells Fargo, Citibank and Bank of America all forced tenders and conversions to common stock by discontinuing the dividends. Recently, Jim Cramer has been promoting preferred stock, telling investors to look at bank-issued preferred stock or preferred stock issued by Chesapeake Energy (NYSE:CHK-D). Shrewd investors would be smart to avoid these issues and focus on buying straight Bank of America or Chesapeake Energy equity.

A much more interesting issuer of preferred stock is Public Storage. The company continues to expand quickly inside the US, while its existing facilities are able to raise rates and rent more units. It is a fantastic domestic business without any European or Asian exposure that performs well regardless of the economic circumstances. College graduation, grad school entrance, moving to a new city, marriage, divorce, downsizing, etc. will always be demand drivers.

Instead of issuing debt, Public Storage funds itself largely by issuing prefered stock at a par value of $25. It occasionally rolls over its higher yielding issues. Several issues are paying just over 6% and trading at par (the D and the F classes). Certain other issues trade dramatically above par as there are certain non-call periods; I would avoid these issues and by the ones currently callable at par.

It seems to me that if you are going to heed Bernanke’s call for 2012, PSA’s preferred is where you go this year. However, nobody should do it blindly and without discipline. Research the issue you are considering carefully before investing. If you are investing in an issue that is currently callable, do not pay a significant premium over the call price. Even issues currently callable have recently traded above $26, and a disciplined investor is always a seller when something that is callable at par goes too far above it.

A disciplined investor also wants to tread cautiously. It makes sense to hold preferred stock as long as rates are low (for however many months or years it takes) and sell before the tide turns. Like bonds, these will quickly become depreciating assets when interest rates start moving up.

If you believe Bernanke is going to keep rates at zero for the foreseeable future, Public Storage is a great place to be for 2012. But, you need to do it carefully, and you need to do it recognizing that one day in the not-to-distant future, individual investors will be forced to sell at a loss because there is never a maturity.