Welcome to Extreme Investor Network, where we provide you with unique and valuable information to help you make the most of your investing opportunities. Today, we’re taking a closer look at the preferred securities market and how investors can still find solid opportunities for yield, even as interest rates are coming down.
Preferred securities are a hybrid between bonds and stocks, offering investors a quarterly stream of income while trading publicly on exchanges. These securities are often issued by banks and utilities, with yields that can surpass 5%. One key advantage for investors is that the income generated from preferred securities may be tax advantaged, with coupons taxed at the same rate as qualified dividends.
When it comes to preferred securities sold to retail investors, they typically come at a fixed par value of $25. The coupons can be fixed for the whole term or “fixed to floating,” where the rate adjusts after a specified period. However, investors need to be aware of call dates, as issuers may choose to redeem the securities in a falling interest rate environment, leading to potential reinvestment risks.
While preferreds offer income, investors should also consider the risks involved. Preferred stockholders have lower seniority than bondholders in a company’s capital structure, meaning in the event of liquidation, they rank below bondholders. Additionally, preferreds with true perpetual securities can experience price volatility due to interest rate sensitivity.
For investors looking to diversify their portfolio with preferreds, consider investing in exchange-traded funds (ETFs) such as the iShares Preferred and Income Securities ETF (PFF) or the First Trust Preferred Securities and Income ETF (FPE). These ETFs offer exposure to a basket of preferreds from different companies, with attractive total returns in recent years.
At Extreme Investor Network, we equip you with the knowledge and insights you need to navigate the preferred securities market and other investment opportunities. Stay tuned for more expert advice and tips to help you maximize your returns and achieve your investing goals.