As the Fed continues to raise interest rates to combat inflation, it would be beneficial to have exposure to fixed-to-floating preferred stocks, explains Rida Morwa, editor High Dividend Opportunities.
We want high yields now and even higher yields in the future. Our latest featured recommendation is the deeply discounted New York Mortgage Trust 7.875% Series E Fixed-to-Float Cumulative Redeemable Preferred Stock (NYMTM).
NYMT is a mortgage REIT that primarily deals with mortgages for single and multi-family residential assets. NYMTM is one of the four currently trading preferred securities issued by NYMT and only one of two that have a fixed-to-floating rate coupon structure.
NYMTM is trading at a significant discount to its par value, with ~16% upside for investors from current prices. It is worth noting that this security traded above par value on numerous occasions, including pre-pandemic days and in 2021, before the markets began their bearish streak.
The preferred stock provides a healthy 9.2% yield. This preferred is callable on 1/15/2025, at which point, if uncalled, it switches to a floating rate at par which will be the 3-month LIBOR rate plus 6.429%.
Calculations based on this week's 2.92% LIBOR rate, the floating rate would be 8.72% compared to the current 7.875% fixed rate. It is worth noting that NYMTM has a much higher floating rate floor than other mREIT peers (including the sister preferred NYMTN), making it a fantastic hedge against higher interest rates.
At the end of Q2, NYMT had $407 million in cash and cash equivalents, which adequately covers NYMT's preferred dividends 9.7 times.
Additionally, NYMTM is a cumulative preferred, meaning missed dividends must be paid in full before the security can be redeemed. These make NYMTM a safe income investment with an attractive upside and a solid hedge against inflation and higher rates.
