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. 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
Why Long-Run Theories of Profit and Accumulation Fall Short
Brexit - Who Wins and Loses
News Blog
Best And Worst States To Retire In The United States
April 2017 Texas Manufacturing Survey Continues to Expand
March 2017 CFNAI Super Index Moving Average Declined
What Is The Informal Labor Market?
Changes In Labor Force Participation
Infographic Of The Day: 10 Habits Of Millionaires For Building Wealth
Early Headlines: Asia Stocks Mostly Up, China Down, Dollar And Oil Up, Gold Down, European Stocks Open Up, 2nd SCOTUS Seat For Trump?, SCOTUS Gets Gerrymander, UK Has Huge Gender Pay Gaps, And More
Most Read Articles Last Week Ending 22 April
GOP Healthcare Plan Would Cost The Poor And Old The Most
These Amazing Creative Animals Show Why Humans Are The Most Innovative Species Of All
Earnings And Economic Reports: Week Starting 24 April 2017
What Americans Think About Climate Change
What We Read Today 23 April 2017 - Special Public Edition
Investing Blog
Market And Sector Analysis 23 April 2017
Markets Rally As Expected
Opinion Blog
America's Gilded Age 2: On The Rocks
What Does The Strong Q1 Growth Mean For China?
Precious Metals Blog
Three Gold Plays For The New Era Of Chaos
Live Markets
24Apr2017 Market Update: DOW Up Triple Digits, WTI Crude Trading In The Low 49's, US Markets Trading Mostly Sideways, US Dollar In The High 98's
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