Tuesday, November 30, 2021

Increasing Dividend Yield Part III: Preferred Stock

This is the third installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio's overall yield-on-cost. Last week we looked at REITs. This week we are looking at Preferred Stock.

Preferred stock is a special equity security that has properties of both equity and debt. Terms of the preferred stock are stated in a "Certificate of Designation" and all are unique to each security. However, there are some generalities. In the order of payments, preferred stock normally has preference to common stock, but are subordinate to bonds. Preferred stock usually has no voting rights, but some have a convertibility feature into common stock. Like bonds, preferred stocks are rated by the major rating agencies such as Moody's and S&P. The rating for preferred stock is generally lower since preferred dividends do not carry the same guarantees as interest payments from bonds, thus offer yields that are higher than bond market yields and common stock yields.

Given the unique nature of each individual preferred stock and the time necessary to research them, many have opted to place their preferred investments in funds such as:

iShares Preferred and Income Securities ETF (PFF) - Yield: 4.5%
The iShares S&P U.S. Preferred Stock Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P U.S. Preferred Stock Index.

Invesco Financial Preferred ETF (PGF) - Yield: 4.8%
Tracks the performance of U.S. listed preferred stocks of preferred stocks issued in the US market by financial institutions and currently includes securities selected by a proprietary selection methodology.

Invesco Preferred ETF (PGX) - Yield: 4.9%
The Index is designed to replicate the total return of a diversified group of investment-grade preferred securities.

Two additional ones to watch are SPDR Bloomberg Barclays Convertible Securities ETF (CWB) and SPDR ICE Preferred Securities ETF (PSK). None of the above are ETNs, instead they are all ETFs. ETNs are linked to the performance of a market benchmark. ETNs are not equities or funds and they carry additional risk compared to an ETF. If the underwriting bank bankrupts, the value of the ETN will be eroded.

Full Disclosure: No position in the aforementioned securities.

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