Preferred Stocks: An Overlooked Alternative
by John Deysher
Anxious investors looking to preserve wealth and pick up yield have increasingly focused on fixed income. But it’s been a tough few years for yield-oriented investors—interest rates are low and the world is awash in liquidity.
As a total return–oriented portfolio manager, I’m constantly on the lookout for income vehicles that can augment our holdings in low-yielding common stocks. One solution: preferred stocks.
In this article
- How They Work
- Advantages
- Disadvantages
- The Preferred Line-Up
- Evaluating Preferreds
- Preferred Closed-End Funds
- Conclusion
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How They Work
Preferred stocks (“preferreds”) have been around for over a century. They represent a slice of a company’s capital structure that is senior to the common shares, but subordinate to the debt (both secured and unsecured).
As with common stock, dividends aren’t guaranteed and must be declared by the board of directors, usually on a quarterly basis. The dividend is usually a specific dollar amount per share or a percentage of par/stated value. (Par/stated values normally range between $25 and $50 per share.)
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Discussion
Great article! Helped me as a novice to clearly understand the world of preferreds.
posted over 2 years ago by Mike from California
Good article. Would like to see a screenable list of preferreds.
posted about 1 year ago by Robert from Washington
I WOULD LIKE TO SEE A COMPLETE LIST OF PREFERRED STOCKS WITH THEIR SYMBOLS AND YIELDS
posted about 1 year ago by Gary from Pennsylvania
Hancock mutual fund has a number of preferred mutual funds all of which are currently paying around 8% in dividends. I currently have substantial holdings of preferred stocks this way, along with significant capital gains. It's been a no brainer for me along with a great source of monthly income without having to decide which preferred stocks are best at this time.
posted about 1 year ago by Walter from Pennsylvania
This article unfortunately overlooked an entire category of preferrreds, which is floating rate preferreds. The "dividend" is reset quarterly at a contractual spread over LIBOR (or some other index), thus interest rate risk discussed in the article is avoided. An additional bonus is that most have a "floor" which limits the downside risk of low interest rates, such as now.
As always, Quantum on-line is the source for finding this subset of investments. Read Quantum's article on preferred stock symbols before getting started.
Note: The effective yield on such floaters will be lower than than for fixed rate preferreds, the difference being the cost of interest rate protection.
posted about 1 year ago by Larry from California
Have several preferreds and their price has held fairly steady versus the topsy turvy of recent market events. They do pay a healthy dividend and have enjoyed that income. I do have a floating rate preferred from Goldman Sachs and its rate which stated on previous comment from Larry based on Libor; it is a little lower then the others (GMAC and NEXTRA ENERGY) but, still has a div. of over 5%. Personally for it not having voting rights; I don't think the amount of shares that most individual investors have make a difference anyway even with voting rights.
posted about 1 year ago by Sanford from Ohio
I have held preferred's for a number of years and they have held up well, continuing to pay their dividends during the financial collapse of 2008. If individual preferred's create too much risk, what's wrong with buying the ETF "PFF" and spreading the risk around? I would like to hear comments about this investment vehicle.
posted about 1 year ago by Robert from Wisconsin
FYI "buyer beware" on preferreds.I built the dividend income portion of my retirement portfolio on (mostly trust type) preferreds.
Most of these were issued by banks and REITs. . . Of those that remain, I have been advised by my brokerage that pending changes to bank capital requirements under Dodd-Frank will allow banks the right to redeem them anytime at par regardless of call date.
I don't know the status of other types of preferreds: non-trust bank preferreds, non-bank preferrds, et.al. Congress can and will do almost anything it wants to without grandfathering existing contractual agreements.
posted about 1 year ago by Robert from Illinois
Are there any lists of preferred stocks and their ratings eaisily available ?
posted about 1 year ago by Donald from Michigan
It would be helpful if you provided a list of preferred stocks and the yields of each one. Also, ranking them according to performance and quality would be helpful.
posted about 1 year ago by Maryanne from South Carolina
Good articel. We retired folks need all the help we can get!
Thanks
posted 9 months ago by Wayne from Oregon
Good article. Found the info from Walter (PA) interesting. Fund prefereds seems a good way to go.
posted 9 months ago by Ed from New York
Good Information, I have used prefereds
in my IRA account.
George
posted 8 months ago by George from Colorado
I have included Prefereds in my portfolio for years. I have lost some money on REIT's but then regain some when the company returns to profit and pays back dividends. (recently $24,300.) I do worry about the upcoming tax increase.
posted 8 months ago by Ron from Texas
I hold issues of Prologis preferred in my IRA, Prologis is a REIT, well managed and they seem to have no interest in calling them. 6.75% at $25 per share works for me.
posted 8 months ago by James from Illinois
Are preferred yields always so much higher than general bond rates?
Why would companies pay much higher rates to preferred stock holders, instead of floating much lower rate bonds?
posted about 1 month ago by Richard Jochem from Wisconsin
