Are you looking to earn higher yields on your money than you can get from bank CDs or Treasury bills? If so, you may want to consider preferred stock funds as an alternative to earn an annual yield from 5 to 7 percent.
Preferred stocks are equities, but bear some similarities to bonds. Like bonds, they pay a set amount on a set date. But like stocks, the payouts are considered dividends rather than interest. Preferred stocks almost always pay a higher yield than the same company’s bonds or common stock. In return for that higher yield, the preferred shares tend not to rise as much as the common if the company does well. But if a company gets into a cash crunch, it would pay its bondholders first and preferred shareholders next. Common shareholders are last in line to get dividends when a company runs into trouble. Unlike bonds, preferred stocks have no maturity date and so could last forever. If the company chooses to, it can call your preferred stock and convert your holdings into common stock. That usually happens when the price of the underlying stock rises sharply, so you come out a winner when your holdings are converted to common shares.
Preferred stocks tend to be issued by financially strong companies such as banks, insurance companies and utilities. They typically are issued at $25 a share, and tend not to move much up or down from that level. You can certainly buy individual preferreds if you like, but an easier way to play preferreds is to buy a mutual fund or exchange traded fund that specializes in them. This way you have a professional manager picking the preferreds and you get the instant diversification of a wide portfolio of issues.