| Bonds Online |
 |
|
| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
|
S&P National Bond Index
|
3.00% |
|
|
S&P California Bond Index
|
2.96% |
|
|
S&P New York Bond Index
|
3.13% |
|
|
S&P National 0-5 Year Municipal Bond Index
|
0.70% |
|
|
| S&P/BGCantor US Treasury Bond |
400.09 |
|
| More |
|
| Income Equities: |
|---|
| Preferred Stocks |
|---|
|
S&P U.S. Preferred Stock Index
|
848.03 |
|
|
S&P U.S. Preferred Stock Index (CAD)
|
636.26 |
|
|
S&P U.S. Preferred Stock Index (TR)
|
1,701.05 |
|
|
S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
|
|
| REITs |
|---|
|
S&P REIT Index
|
174.07 |
|
|
S&P REIT Index (TR)
|
425.30 |
|
|
| MLPs |
|---|
|
S&P MLP Index
|
2,469.58 |
|
|
S&P MLP Index (TR)
|
5,428.50 |
|
|
See Data
|
|
|
|
 |
|
|
|
|
|
|
Profiting from Preferred Stocks |
HoweStreet.com - July 21, 2010 - By Jonas Elmerraji
Dividends are one of the few silver linings in a bad market. While other investors watch their portfolios’ values fall, income investors rest assured that — regardless of where the market sets their share prices — they have a constant stream of dividend income to rely on.
At present, the S&P 500 has a dividend yield of 2.51%... that means that if you retire with a $2 million portfolio of S&P stocks today, you can pretty much count on annual dividend income of $50,200. That’s not too shabby.
But while the dividend yield of common stock is pretty good on average, there’s actually a preferable investment out there when it comes to generating income. I’m talking about preferred stock.
Don’t let the name fool you — preferred stock has little in common with its better-known cousin. Companies issue preferred stock as a way to raise funds that’s an alternative to issuing debt. In exchange, those companies promise to pay out a dividend that’s set... say 5% of the stock’s par value.
The fact that preferred stock pays a set dividend is important. For starters, it means that unlike common stock, which has no standard dividend rate (dividends for common shares are paid at the discretion of the board of directors), owners of preferred shares more or less know how much income they’ll receive from their investments. Because of this, preferred shares are actually considered to be “fixed income” securities — more like bonds than other stocks.
The Benefits of Buying Preferred
There are a number of reasons to look at preferred shares over regular common stock. First and foremost is the dividend yield. Unlike S&P 500 common stocks that pay out an average of 2.51%, preferred shares average 9.34% annually. That means that the same $2 million retirement portfolio would be cutting you checks of $186,800 each year — 3.7 times the amount stock investments will make for you.
And you’ll get those dividends before a common stock investor sees a cent.
Another nice factor to consider is that those distributions won’t be taxed like regular earned income — since it’s not a write-off for the company paying it, dividend income is generally only taxed at 15%.
Preferred shares come in two general forms, cumulative and non-cumulative. The difference is that with cumulative shares, when a company is unable to pay preferred shareholders’ dividends one year, they owe twice as much dividend money the next year.
That extra owed money (called “in arrears” on the company’s books) must be paid before common stockholders get any dividends at all. If preferred stock isn’t cumulative, preferred dividends must still be doled out before common stockholders get a crack at the company’s cash, but the money doesn’t carry over from year to year.
While preferred shares are considered fixed-income securities for investment purposes, from a legal perspective they’re equity, and just like a regular share of common stock, they entitle the holder to ownership in the company. What makes preferred shares better, though, is the fact that in the event of liquidation preferred shareholders get preferential liquidation rights.
That means that if a company is going out of business, investors who own preferred shares have rights to any of the company’s remaining assets before the other investors do.
Liquidation rights have a pecking order that goes something like this:
Creditors — Assets go first to the people and companies that are owed money.
Preferred Shareholders — Owning preferred shares puts you second in line for a company’s assets.
Common Shareholders — People who own regular common stock get what (if anything) is left over.
Another nice feature of preferred shares is that they’re inherently flexible in nature. In other words, companies issuing preferred stock have the option to add almost any feature they want to the stock. One of the most popular features is convertibility, where preferred shareholders have the option to exchange their preferred shares for a set amount of common shares.
That flexibility also means that no two preferred share issues are created equal. It’s essential to understand what specific features a certain issue of preferred stock has before you decide to start investing in it.
Drawbacks of Preferred Stock
As you might expect from something with so many benefits, preferred stock isn’t without its share of drawbacks.
Unlike common stock, preferred stock generally doesn’t have voting rights. That means that while preferred shareholders get first dibs on the company’s dividend money and assets, they don’t get a hand in shaping its direction.
That’s a pretty big deal when you have a big chunk of your money in the stock of a company. One way around this limitation is by converting your preferred shares into common shares in order to vote; remember, though that conversion is a one-way street. If you’re not willing to part with your preferred stock benefits, don’t go that route, as you won’t be able to convert back to preferred shares.
Even if you don’t sell or convert your preferred shares, they can sometimes be taken from you anyway. That’s because some preferred issues are callable, meaning that the company has the ability to take back its preferred shares in exchange for some sort of payment.
While companies who opt to call their preferred shares usually offer very nice compensation in exchange, if you’re counting on the income from your preferred shares, you could be in a tricky spot if you’re unable to find an alternative investment afterward. This is yet another reason to understand the features of your particular preferred shares.
Finally, like stocks that are traded off an exchange, preferred shares tend to be more thinly traded than most common stocks. That’s not a huge concern for buy-and-hold income investors who are trying to take advantage of those colossal dividend distributions, but it’s still something to keep in mind.
How to Buy Preferred Stock
Despite all of the differences we’ve talked about between common and preferred stock, the buying process is exactly the same; just call up your broker and place an order.
Generally speaking, commissions are the same for both preferred and common stock, but it’s best to check with your broker on their specific fees for buying preferred shares.
If you haven’t considered investing in preferred stock before, it’s time to give this special class of stock a second look. With higher dividend yields and better liquidation rights, preferred shares might just be the preferable investment for your income portfolio.
Cheers,
Jonas Elmerraji
P.S.: If income stocks are what you’re after, I suggest you take a look at Jim Nelson’s Lifetime Income Report. In it, he shows you how you could collect checks as often as every 15 days! Click here to learn about his system…
|
|
|
|
|
|
| Partner Market Place |
|
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
|
|
| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
