Is Success Too Much Stress? Try Preferred Stocks

Share |

Years ago, a widow became upset with her investment adviser for doing too well with her portfolio.

A passive and conservative investor who didn't want to think about money, she felt safe with annual, single-digit percentage gains. When the broker called to report high-double-digit gains in her portfolio for the year, she became upset.

Some investors can't handle any volatility or stress, even that which involves success.

For such investors, preferred stocks might be worth considering.

A preferred stock is in some ways more like a bond. If a company goes belly up and liquidates, the bondholders are first in line. Preferred stock holders are next, followed by common stock holders who often won't get much more than a hearty good wish.

The dividend yield is generally higher for a preferred stock than for a common stock.

The drawback is that price appreciation is less likely.

For the passive investor, exchange traded funds might be a good choice. Preferred stocks generally aren't as liquid as common stocks, so an ETF with good trading volume can avoid that problem.

The exchange traded fundiShares S&P U.S.Preferred Stock Index ( PFF ) offers an annualized yield of 5.7%. Average daily volume in the ETF is 1.2 million shares.

As of Oct. 2, the fund held 267 issues. The sector breakdown is 42% diversified, 25% banks, 9% insurers, 8% real estate, 4% utilities, 3% capital goods, 3% automobile, 2% telecommunications, 1% energy and the rest fractional.

Payments are made monthly.

PowerShares Preferred Portfolio ( PGX ) provides a 6.3% annualized yield. Average daily volume is about 766,000.

As of Oct. 3, the fund held 151 issues. The fund is based on the BofA Merrill Lynch Core Fixed Rate Preferred Securities Index. The sector breakdown is 92% financial, 5% utilities and 2% telecommunications and the rest, fractional.

Payments are made monthly.

Conservative investors sometimes aim for safety but end up with the riskiest investments of all. If you seek safety in preferred stocks, don't let yield alone dictate the choice. An abnormally high yield often means abnormal risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: PFF , PGX

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos



Most Active by Volume

  • $16.15 ▲ 0.12%
  • $58.94 ▼ 1.31%
  • $26.56 ▲ 1.68%
  • $86.20 ▲ 0.02%
  • $23.21 ▲ 0.78%
  • $23.91 ▲ 6.36%
  • $4.289 ▲ 4.36%
  • $40.01 ▼ 0.97%
As of 4/17/2014, 04:07 PM