Dividend ideas for shipping investors

Dry bulk preferred stocks

As investors, we can choose between capital preservation, income generation, and capital gains. At best, we can pick two. The remaining option is the price.

Let’s say we focus on growth, with the complementary goal of income generation, and then compromise on the safety of the principal. Or we seek only double-digit Alpha and accept a higher risk of principal loss.

No solutions, only trade-offs.

Today’s article covers income generation as a goal and enhanced safety of the principal as complementary. The price we pay is almost non existent upside potential. The instruments that cover those requirements are debt securities and preferred equity.

Shipping enterprises offer lucrative preferred units/shares. For income-seeking investors, they are great alternatives to common dividend stocks or corporate bonds.

I will cover shipping preferred stocks in three articles, each dedicated to an individual segment. Today, we start with dry bulk. But first, some theory.

How to pick preferred stock?

Preferred equity is more similar to bonds than to common equity. The upside potential is capped, so we obtain inversed asymmetry. In other words, we risk a total loss of the principal to get, let’s say, a 9.0% dividend yield. It seems an unattractive proposition.

However, the probability of loss is lower than that of common equity. This is not to say the chances of loss are zero; they are far from that. Yet, they are low enough to compensate for the unfavorable risk reward.

We must never forget that the game of markets is not only about risk-reward but also about probabilities.

Debt holders and preferred equity investors prioritize income and safety in exchange for growth. Equity investors focus on capital gains at the detriment of investment safety and income.

In other words, debt and preferred equity investors play a game with low chances of losing and low potential payoff. Conversely, equity investors wager on large payoffs with a higher probability of total loss. These details are crucial because they define debt (and preferred equity) and equity investors' motives to enter a transaction.

Debt holders and preferred equity investors emphasize downside risk mitigation. The reason is simple: bonds and preferred shares offer fixed income and (typically) zero growth potential, and the only way to improve risk reward is to reduce the downside risk.

So, we must focus on the company’s capacity to survive. Our task is to scrutinize its balance sheet to estimate its liquidity, solvency, and capital structure. First, the company must generate sufficient cash flows to cover its preferred equity distributions. Second, operating income must exceed gross interest payments.