Should you Consider Preferred Stocks?

imagesIn the past, investment grade corporate bonds or government bonds were considered a solid investment vehicle, offering a safe 6-7% interest rate. However, in today’s uncertain economic climate, this is simply not the case. For instance, the investment of government bonds with a ten-year maturity might only provide a yield of 1.6% in today’s market. Factor in the after-inflation yield and you could be looking at negative returns. So what is an investor to do? Are there any solutions that can help today’s investor overcome these scarce returns?

One thing to think about is a bond substitute, such as an investment quality preferred stock. We consider this type of investment a crossbreed of sorts which lie somewhere between a bond and a stock. Investment grade preferred stocks are a type 1 investment for 612 companies, unlike common stocks, which are a type 2 investment.  In addition, the dividend qualifies for a 70% exclusion for income tax purposes. However, you just can’t jump in and buy these instruments eyeing higher yields without also understanding the risks.

You must know the details of the investment to understand what you are getting.  There are risks that the company may call (force you to sell) the preferred stock, stop payment of dividends if the company is experiencing financial trouble, and they may have a very long to unlimited maturity.   There are preferred stocks available in the market that mitigate these risks, but it takes a lot of effort to find them.  The advisor must resolve to do the due diligence to make sure they are appropriate for the portfolio and to be aware of the risks involved. This investment instrument is not for the advisor that does not monitor their investments or take the time to read the prospectuses and understand how exactly they work.

While preferred stocks can carry a higher risk than bonds, high-quality investment grade preferred stocks can be a suitable choice and are only slightly more volatile than bonds.  A diversified portfolio utilizing a measure of preferred stocks might just be the tool you need to add some stability to your investment mix and increase your portfolio returns.

Do you want to know more about using preferred stocks to generate income as a bond substitute? Contact the team at Financial Fiduciaries for more information.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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