Editor's Note: Today I invited my colleague and
contributing editor Steve Mauzy to share once of his favorite
investment ideas in this issue of Income & Prosperity. For
those of you unfamiliar with Steve's work, he's a top income
investing expert and analyst at my High Yield Wealth investment
If you're willing to venture a little out of your traditional
income investor "comfort zone," you can achieve something that
You can lower your risk, diversify your income, AND still
collect healthy yields of over 7% a year.
If that sounds good to you, consider preferred stocks - hybrid
securities that have characteristics of both stocks and
You might have heard of these investments before, and perhaps
thought you need a fortune to invest in them - or that they're
But neither of these concerns is true.
Preferred stocks are like common stocks in that they pay
dividends, and their shares trade on the major stock
Preferred stocks are like bonds in that they are issued with a
dividend-coupon based on par value. What's more, dividends are
contractual, just like interest on a bond, so you know your cash
flow ahead of time.
And like bonds, most preferred stocks are followed by rating
agencies like Moody's and Standard & Poor's.
In short, preferred stocks are safer than common stocks
because they have a higher claim on the company's assets. And in
some instances, they are nearly as safe as bonds.
Best of all, there are quality preferred stocks that yield 7%
and above. Good luck finding a quality bond or CD with a similar
I mentioned that preferred stocks pay dividends, which imparts
a tax advantage compared to interest on bonds (except some
municipal bonds). Qualified preferred-stock dividends are taxed
at a maximum rate of 15%, while interest is taxed at your
marginal income tax rate.
To be sure, preferred stocks aren't perfect. Individual
selection can be an issue for some investors, because preferred
stocks have a few more moving parts compared to common
For instance, the vast majority of preferred stocks have a
call date, where the issuing company can redeem the preferred
stock. A call date doesn't mean an issue will be called, it means
it can be called. But if a preferred stock is trading above par
value, normally $25 a share, you can suffer a capital loss if you
pick an issue that's called.
For this reason, I think preferred-stock funds are the safest
bet. Funds are diversified, which assures there's no income
disruption should any one issue be called; diversification also
reduces portfolio risk.
One year ago, I added
Nuveen Quality Preferred Income Fund II (
, a closed-end preferred-stock fund, to the
High Yield Wealth
portfolio. This fund has performed exactly as expected -
providing high-yield income with low price volatility. In
addition to the nice yield, this fund has also risen in
Therefore, Nuveen serves a vital function. It's a proper
fixed-income investment before the Federal Reserve wrung income
out of most traditional fixed-income sources.
To be sure, there are many preferred-fund options. I could
have chosen a preferred-stock ETF, but as a closed-end fund,
Nuveen offers a few advantages.
For one, Nuveen is activity managed, which means it's able to
generate a reliable monthly dividend in equal increments, at
$0.055 a month. This is an important consideration if you depend
on your investments to cover living expenses.
, in contrast, pay a variable dividend, so investors aren't sure
what they'll get each month. Keep in mind that my preferred
investment is a fixed-income surrogate, so I need to be
reasonably assured of a reliable income stream.
Yield is another advantage. The Nuveen fund yields 7.5% as I
write, which is 170 basis points higher than the 5.8% yield
provided by the popular ETF
iShares S&P U.S. Preferred Stock Index Fund (
Here again, active management instills an advantage. Because
Nuveen is actively managed, it can employ leverage where an ETF
Nuveen's uses a reasonable amount of leverage to boost income.
By exploiting today's low interest rates, the manager is able to
consistently generate a yield higher than the vast majority of
ETFs and quality individual issues. Applying the same strategy to
an individual preferred stock would be risky for most
So if you to need to fill a fixed-income void left by the
Fed's unconscionable monetary policies, Nuveen Quality Preferred
Income Fund II is an investment that can fill that void.