"One of the hottest themes of 2009 for big-cap money managers is to take a stake in high-yielding preferred stocks in companies backed by the Troubled Asset Relief Program.
"Preferred stocks were smoked with the credit markets in the latter part of 2008, to a point where the definition of 'capitulation' was rewritten for all time. But investors are still attracted to preferreds because yields are near double digits, and famed investors like Warren Buffett are also investing their money there.
"In addition, governments around the world have taken equity stakes in troubled banks through preferred shares. And now, with the TARP funds, fund managers have been legging into high-quality preferred shares backed by the nation's largest banks.
"It sounds toxic, but these banks are now government-guaranteed to survive this recession. And they will come out the other side smelling like roses, no matter how long it takes.
"So what strategy is the best? Investing in iShares S&P US Preferred Stock Index. About 90% of the portfolio's assets are in the financial sector simply because banks and insurance companies are among the largest issuers of preferred shares.
"Accordingly, investors should be aware that most of their investment will be tied up in the troubled financial sector, and the real estate, materials, health care, and auto sectors. As the credit markets recover, I think PFF will be a great investment. And talk about yield power! PFF has a 30-day yield of 9.3%.
"And I like the makeup of this portfolio -- which includes Wells Fargo, Freeport-McMoRan Copper & Gold, Citigroup, and MetLife, to name a few -- for a number of reasons, but mostly because the government is backstopping all these companies."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
