FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 23 December 2016

Investing In Preferred Stocks Part 2

by Russ Allen, Online Trading Academy Instructor

Online Trading Academy Article of the Week

In a previous article, I described the basic structure of preferred stocks. I concluded:

"For high yields, steady income, flexibility and tax efficiency, preferred stocks can be a winning solution for many investors."

I mentioned that preferred stocks often generate more cash flow, in the form of dividends, than the interest on bonds or the dividends on the common stock of the same issuing company. This can make them attractive to investors looking for current spendable income.

The fact that preferred stocks can be bought in small quantities, often at about $25 a share, makes it easy and inexpensive to diversify a preferred stock portfolio, compared to a bond portfolio. Taxation is another bonus, as preferred stocks often generate "qualified" dividends which are taxed at rates similar to capital gains (15-20%) instead of at ordinary income rates as bond interest is (up to 35% or more).

If this sounds interesting, you might want to look further into investing in preferred stocks. If so, there are a few things to consider.

Where to find preferred stock candidates

There are a number of websites that are devoted to preferred stocks. They offer screeners and other tools to point you in the right direction. One good example is

The benefits and risks of investing in preferred stocks.

Risks of Preferred Stocks

Preferred stocks come with their own set of risks. Here are some of the main ones:

  • Risk of Nonpayment of Dividends - Since they are not a debt interest but are instead an ownership interest, the issuing company can suspend payment of the preferred dividends if cash is not available to pay them. Usually they must catch up on any late preferred dividends before making any payments to common shareholders. Such preferred shares are referred to as "cumulative". If that is not the case, the shares will usually have "non-cumulative" in the name. These should generally be avoided. It is wise to check on the dividend history of any preferred stock you are considering. Dividend history is available from or from A long unbroken dividend record is a good sign, though not a conclusive one, that the company is likely to continue paying their dividends.

  • Credit Risk - Preferred shareholders are relying on the ability of the issuing company to continue to stay in business and meet its obligations. It is a good idea to check out the credit rating of any company whose preferred stock you are considering. You can register at the sites of or for free, and look up the credit rating of any company whose preferreds you are considering by entering its ticker symbol into their search engine. The highest ratings are AAA, then AA, A, BBB, BB, etc. BBB is the lowest credit rating which is considered "investment grade". Ratings of A or better indicate low risk of failure to pay dividends.

  • Interest Rate Risk -. Preferred stocks pay a fixed amount in dividends per year. The shares will be designated with a name like "5.375% Series E Preference Shares". That 5.375% in the name means that the shares pay a dividend of $5.375 per hundred dollars of face value every year. This amount will not change as long as the preferred shares are outstanding. In other words, preferred stock dividends do not increase, as dividends on common stock can. If the interest rate environment changes, that fixed dividend amount will become less attractive relative to other investment alternatives. In that case the market value of the preferred shares will drop. This is a concern if you need to sell the preferred shares. If you plan to hold them indefinitely, it will have little effect on you.

  • Call Risk - Some preferreds are callable after a certain future date. This means that the issuing company can redeem them by paying the face value of the shares. This will usually happen only in a falling rate environment where the company can issue new debt or preferred shares with lower rates than the existing ones. Many preferreds continue to exist and pay their dividends long after the call date.

  • Event Risk - This is a catch-all term for the risk that something bad could happen to any company. By definition, these events are unforeseen so it is hard to plan for them. One sign that a company is more vulnerable than usual to something happening that you don't know about, is that their yields are much higher than that of their peers. This means that even though you can't see a problem, someone else knows something. If an A-rated company's preferred shares are paying a 13% dividend in a 6% world, it is a pretty sure sign of trouble ahead. In preferred yields, as in anything else in life, if it seems too good to be true it probably is. The best policy is to avoid the highest-yielding choices in each category, especially if those yields are way out of line.

By doing your due diligence as outlined above, and spreading your investment in preferred stocks among several different companies, you can build a solid portfolio of income-generating assets for your "steady income" allocation

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Investing


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Minsky’s Theory of Asset Prices: Why Minsky Was NOT a Neo-Monetarist
Finance and Growth: The Direction of Causality
News Blog
Early Headlines: Asia Stocks Mixed, Oil Up, Dollar Down, China GDP On Target, GOP Govs Defend Medicaid Expans., Trump Wants To Cut Fed. Spending By $ 1 Trn, Trump's Troubling Foreign Deals And More
The Fake News That Sealed The Fate Of Antony And Cleopatra
The Jobs With The Biggest Cash Bonuses
Astronomers Spot Strange, Bow-like Structure In Venus' Atmosphere
Raising A Child Is An Extremely Expensive Undertaking
The World's Staggering Wealth Divide
What We Read Today 19 January 2017
OK Go - The One Moment - Official Video
January 2017 Philly Fed Manufacturing Survey Significantly Improves and Remains In Expansion.
December 2016 Residential Building Sector Mixed
14 January 2017 Initial Unemployment Claims Rolling Average Improvement Continues
Stock Market Bull Faces Important Test
Infographic Of The Day: Movies That Struck Oil
Investing Blog
How To Invest In Oil For Long-term Investors Technical Summary 19 January 2017
Opinion Blog
What Is The Natural Interest Rate - And What If We Go Above It?
A New Deal With Capitalism Requires A Revolution In Politics And Markets
Precious Metals Blog
Four Catalysts Drive Gold And Silver For 2017
Live Markets
19Jan2017 Market Close: Wall Street Closes Down Fractionally On Lackluster Investor Participation Ahead Of Tomorrow's Presidential Inauguration, George Soros Said That Global Markets Will Falter
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved