Financial Adviser: 5 Dividend-Paying Preferred Stocks Every Saver Can Buy to Earn Up to 10.58% p.a.

Rising interest rates and inflation have led to an increase in the dividend yields of preferred stocks on the Philippine Stock Exchange, coinciding with a decline in share prices due to negative market sentiment.

The median dividend yields of listed preferred shares have risen to 6.73 percent to date, up from 6.10 percent last year. Preferred stocks, functioning as both debt and equity, pay fixed dividends annually, akin to a bond's interest income.

As the market price of a preferred stock decreases, the cost of investment becomes more affordable, resulting in a higher effective dividend yield. Currently, the median dividend yields of preferred stocks at 6.73 percent are higher than the 10-year Philippine bond yield at 6.254 percent and the seven-year bond yield at 6.172 percent.

Current correction in short-term interest rates may drive share prices higher, potentially making investments in preferred shares appealing as dividend yields rise.

It's worth noting that preferred stocks enjoy a tax advantage over fixed income. While interest income from bonds is typically subject to a final tax of 20 percent, dividends from preferred stocks are taxed at only 10 percent.

Moreover, the trading flexibility of preferred stocks allows investments as low as P10,000, with buy-and-sell decisions easily made in real-time. In contrast, bonds require a minimum investment amount and involve brokers, potentially leading to execution times exceeding 24 hours. 

Before investing in preferred stocks, it's crucial to consider that during financial distress, company issuers may delay dividend payments, posing a risk of indefinite waiting for promised dividends if the financial situation worsens.

Therefore, it's imperative to ensure that the company is financially capable of timely dividend payments by reviewing its profitability and financial performance.

Investors should assess the probability of the company consistently fulfilling its promise to pay dividends and its ability to generate sufficient cash flow to cover projected dividends, in addition to existing interest expenses.

There are only 36 active preferred stocks in the Philippine Stock Exchange. Let’s review and update the top five preferred stocks in the market that pay the highest yield today:

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1| DoubleDragon Corporation (DDPR)

Price: P91.55

Yield: 10.58 percent 

DoubleDragon Corporation (PSE: DD) is one of the country's foremost property leasing companies, boasting a vast leasable portfolio exceeding 1.2 million square meters across retail, office, hospitality, and industrial sectors.

About 46 percent of its total revenues come from rental income, while 20 percent come from real estate sales, and the balance is derived from hotel revenues and other income.

Last year, DD's total revenues declined by 11.3 percent to P14.1 billion from P15.9 billion in 2021. However, if we exclude the unrealized gain from changes in fair values of investment property, DD's total revenues from its operations would be P6.65 billion. This figure represents a growth of 6.2 percent from the P6.25 billion recorded in 2021

As a result, DD’s net income grew by 14.6 percent to P12.9 billion from P11.3 billion in 2021.

This year, DD’s total revenues for the first nine months increased by 3.0 percent to P6.14 billion from P5.9 billion in the same period last year while net income was almost flat at P2.47 billion due to higher operating expenses.

As of September 2023, DD's debt-to-equity ratio is 0.78 times, suggesting a nearly equal contribution of funding from both equity and debt. The debt-to-equity ratio is a financial measure that assesses the relationship between a company's total debt and its shareholders' equity. In this case, the ratio indicates a balanced mix of equity and debt in DD's capital structure.

DD’s preferred shares (PSE: DDPR) has an initial dividend rate of 6.4778 percent or P6.5778 per share. The shares, which were listed in 2016, were supposed to be redeemed this year after seven years, but since interest rates have also increased, management decided to keep the step-up rate.

The step-up rate shall be computed as the higher of the 6.4778 percent or the 10-year PDST-R2 rate plus 150 basis points, which is 9.685 percent.

The step-up rate of P9.685 per share represents an increase of 47.2 percent from its initial dividend of P6.4778 per share.

Because of the non-redemption of the preferred shares, DDPR share price has declined by 8.45 percent from P100 per share in July this year to P91.55 per share. The decline in the share price plus the increase in the dividend rate resulted to a high dividend yield of 10.58 percent.

2| San Miguel Corporation (SMC20)

Price: P77.35

Yield: 8.33 percent

San Miguel Corporation (PSE: SMC) is one of the Philippines' largest and most diversified conglomerates, with revenues equivalent to about four percent of the country's Gross Domestic Product.

SMC owns market-leading businesses and has investments in various sectors, including beverages, food, packaging, energy, fuel and oil, infrastructure, cement, property development and leasing, car distributorship, and banking services.

About 53.5 percent of SMC’s total revenues come from fuel and oil, 27 percent from food and beverage, 12.4 percent from infrastructure, and the remainder from packaging, cement, real estate, and other sources.

Last year, SMC’s total revenues grew by 60 percent to P1.506 billion from P941 billion in 2021. However, lower gross profits and higher financing charges and other expenses resulted in a 44.4 percent decrease in its net income, which fell to P26.7 billion from P48.2 billion the previous year.

This year, SMC’s total revenues for the first nine months slowed down, declining by 4.6 percent to P1.061 trillion from P1.112 trillion in the same period last year but improved gross profit margin and lower other expenses enabled SMC to report higher net income at P31.2 billion, which more than doubled the P12.9 billion income last year.

SMC has seven series of preferred shares listed in the market with SMC2O having the highest dividend yield at 8.33 percent in the group. SMC2O is one of the three preferred shares that have been listed recently.

The other two are SMC2L, which has a current dividend yield of 6.03 percent and SMC2N, which has a yield of 7.94 percent, which you may consider to invest as part of your diversification.

The other SMC preferred shares are expected to be redeemed this month. These are SMC2F, which has a current yield of 7.09 percent; SMC2I at 6.6 percent; SMC2J at 5.24 percent; and SMC2K at 4.9 percent.

The other alternative is to look at SMC’s 68-percent owned subsidiary, Petron Corporation, which has three listed preferred shares: PRF3B, PRF3A, and PRF4B.

PRF3B pays P71.38 per share annually and has a dividend yield of 7.38 percent, while PRF3A currently pays a dividend yield of 7.08 percent or P68.71 per share. PRF4B has a current dividend yield of 6.80 percent.

3| Cirtek Holdings Philippines (TCB2D)

Price: P49.05

Yield: 7.90 percent 

Cirtek Holdings Philippines (PSE: TECH) is primarily engaged in the manufacturing of value-added, highly integrated technology products and semiconductor packages.

TECH's revenues, which are largely driven by exports and customer engagements from Europe and the United States, has maintained a steady growth. Over the past 12 years, the company has experienced an impressive average annual growth rate of 9.7 percent, surging from $23 million in 2009 to $70 million in 2021.

The consistent growth in TECH’s revenues enabled its net income to grow by an average of 19.4 percent per year to $8.1 million in 2021 from $963,000 in 2009.

Last year, TECH’s total revenues recovered strongly by 20 percent to $84.8 million, which resulted in a 39 percent increase in net income to $11.3 million.

But this year, TECH faced headwinds due to a deceleration in the US and European economies. The company saw a 10 percent decline in total revenue for the first nine months, dropping from $67.8 million to $61.2 million in the same period last year. The fall in revenues resulted to an 11 percent contraction in earnings falling to $7.6 million from $8.5 million in 2022.

TECH’s debt-to-equity ratio currently stands at 0.25 as of September 2023. TECH has two types of preferred shares, TCB2C and TCB2D.

TCB2C, which has a mandatory redemption period of three years, pays P3.29 per share annually over four quarters. At the current share price of the stock, TCB2C has a dividend yield of 6.73 percent.

TCB2D, on the other hand, has a redemption period of five years. The stock pays P3.88 per share annually over four quarters. At the current price of the stock, TCB2D has an attractive dividend yield of 7.90 percent.

4| Megawide Construction (MWP5)

Price: P101

Yield: 7.83 percent

Megawide Construction (MWIDE) is one of the largest infrastructure companies with significant interests in construction, property development, airport and terminal operations, and renewable energy.

Last year, MWIDE’s total revenues were almost flat at P14.8 billion, which is 2.0 percent lower than its revenues in 2021, amounting to P15.0 billion. This was primarily due to the 64 percent decline in its landport revenues.

Despite this, MWIDE reported a net income of P2.8 billion, primarily attributed to the one-time gain on the sale of its airport business, amounting to P4.7 billion. This gain helped offset its operational loss of P1.9 billion.

This year, MWIDE’s total revenues for the first nine months recovered, increasing by 46.8 percent to P15.5 billion from P10.5 billion in the same period last year. The robust recovery facilitated MWIDE's turnaround, resulting in a net income of P332 million compared to a net loss of P30 million in the previous year.

MWIDE has three listed preferred shares: MWP5, MWP2B, and MWP4. Among the three, MWP5, which pays an annual dividend of P7.90 per share, has the highest yield at 7.83 percent. This is followed by MWP2B with 6.15 percent and MWP4 at 5.65 percent.

5|AC Energy (ACENB)

Price: P1,070

Yield: 7.48 percent

AC Energy (PSE: ACEN) is one of the largest listed renewable energy companies in Southeast Asia with a total net attributable capacity of 4,000 MW.

About 40 percent of its total capacity is contributed by its operations in the Philippines while the balance of 60 percent is shared by Vietnam, Indonesia, India, and Australia.

ACEN, which sources its renewable energy mainly from solar and wind power, currently operates about 68 percent of its total capacity, while 32 percent is still under construction.

In 2021, ACEN’s total revenues grew 27 percent to P26.1 billion from P20.5 billion the previous year. The increase in revenues boosted its total net income by 22 percent to P5.3 billion from P4.3 billion in 2020, due to higher earnings contribution from its international operations.

Last year, ACEN’s total revenues continued to grow by 35 percent to P35 billion, but gross profits led to a decline in its EBITDA by 25 percent from P11.7 billion in 2021 to P8.8 billion due to higher costs of electricity.

Nevertheless, ACEN’s net income for 2022 grew by 149 percent to P13 billion from P5.3 billion in 2021. This was due to the one-time gain booking of P8.6 billion from its Australian revaluation gains. Without it, net income would have declined by 16.9 percent to P4.4 billion.

ACEN has two preferred shares, ACENA and ACENB. ACENA carries an initial dividend rate of 7.13 percent per annum, with a dividend rate re-setting on the fifth anniversary of the listing date, while ACENB has a fixed dividend rate of 8.0 percent per annum with no dividend rate re-setting, making it the first Philippine Peso-denominated fixed-for-life equity instrument listed on the PSE.

At the current market prices, ACENB has a higher dividend yield at 7.48 percent, while ACENA has yield of 6.96 percent.