When you’re in the business of selling equity to income investors, selling them preferred equity with a typically higher coupon tends not to signal strength.

Within the MLP sector preferred issues were marketed most enthusiastically by the upstream production partnerships that have either gone bankrupt or are hanging to solvency by their fingernails.

They were also peddled, with somewhat less terrible results, by several maritime partnerships. Most of those issues also traded far below par during the worst of last winter’s market storms.

At the height of the related funding crunch, several large midstream partnerships sold preferred equity stakes to private investors, typically with an option to convert them eventually into common units. But only two midstream preferred issues can be bought by the public. Let’s look at these in greater detail to illustrate some of the issues investors in preferred securities must confront.

Targa Resource Partners pfd. Series A (NYSE: NGLS-A) was issued by an MLP by that name before it merged with sponsor Targa Resources (NYSE: TRGP) early this year. Targa is a diversified midstream operator in most of the leading shale basins, providing gathering, processing and shipping of oil and gas along with port logistics for energy exporters.

Like most other preferred issues, this one ranks in the capital structure behind all the debt but ahead of common equity. The Series A is what’s known as a “fixed-to-floating rate cumulative redeemable perpetual preferred,” all those adjectives qualifying a yield of 9% at the $25 face value.

The floating starts on Nov. 1, 2020, when the coupon goes from 9% to 7.71% plus the one-month London Interbank Offered Rate. The one-month LIBOR is currently at 0.55%, and if that were still true four years from now the Targa preferred would yield just shy of 8.3% at the floating rate.

Also in four years, Targa will gain the right to redeem the preferred stock at the face value of $25 plus any unpaid dividends. NGLS-A ended last week at $25.88, a 3.5% premium to face value.

With midstream fundamentals still lackluster  but gradually improving — as reflected in the recently rising price of its common stock — Targa looks very well placed to meet its long-term obligations to preferred shareholders.  It pays 18.75 cents per preferred unit on the 15th of each month; these payouts are taxed as ordinary income without deferral.

Of course, the extra security of preferred placement in the capital structure also caps the upside here. But an 8.7% midstream yield that’s pretty darn safe probably deserves a spot in most energy income portfolios at this time. Adjusting our expected returns for the shares’ current premium to face value still works out to roughly 8% annualized, nothing to sneeze at.

The other midstream public offering of preferred stock also came on the market roughly a year ago, as part of Kinder Morgan’s (NYSE: KMI) ultimately doomed effort to protect its dividend. The Kinder Morgan 9.75% Series A (NYSE: KMI-A) mandatory convertible preferred was marketed in the relatively early stages of the common stock’s evisceration late last year, locking in unfavorable conversion terms.

The issue matures on Oct. 26, 2018, at which point the Series A will be converted into common stock at a minimum price of $27.56 per common unit, 20% above the current price. Should the common rise above that level over the next two years the conversion price would take place at the market price up to a maximum of $32.28 per share. If the common were to rally above that level, the preferred shareholders would capture that upside. In effect, buyers of the preferred are selling the issuer collar protection in options trading terms, the equivalent of selling a put with a $27.56 strike and buying a call above $32.28.

Underwater by about 20% with not quite two years to go, the KMI-A still trades, rather amazingly, only about 1.5% shy of its $50 face value. That puts the current annualized yield at 9.9%. But of course if the common stays where it is for the next 23 months, that $50 of preferred will turn into common worth just shy of $40.

I don’t think it’s possible to short this egregiously overpriced security. Which is too bad, because doing so while hedging with a long position in the common stock would be a no-brainer.

As for the few maritime partnership preferreds out there, I’d suggest steering clear. A couple trade near face value at yields below 10%, insufficient for an investment without much capital appreciation potential but plenty of depreciation risk in a volatile sector. And then there are the two issues from the strapped Navios empire, flashing 25% yields indicative of widespread skepticism about the security of those securities.

So the Targa preferred issue is the only one in the MLP space I’d recommend. We’re not making it a formal recommendation right now for selfish reasons having to do with the simplified (and unflattering) method we use to calculate our model portfolio returns: simply by averaging the actual returns of all the recommendations, even those in the  portfolios for just a couple of months, without annualizing them. In effect, adding a preferred issue not likely to move or yield much over the next month would drag down the reported returns in a way that would be neither accurate nor worthwhile at this point. So I’m not going to do that, but don’t let that stop you. Assuming my current assumptions still hold, we could well add the Targa Resource Partners pfd. Series A (NYSE: NGLS-A) to the Conservative Portfolio in January.