Preferred Picks for Income

03/14/2016 9:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

It's hard out there for income investors. Thanks to the Federal Reserve, interest rates remain near historic lows, observes Ari Charney in Investing Daily’s Utility & Income.

Money markets and risk-free Treasuries haven't offered attractive yields in nearly a decade.

Most income investors shouldn't stretch for yield. After all, high yields don't come without higher risk. But there is another way.

Preferreds are considered hybrid securities because they have characteristics similar to both debt and equity.

Like bonds, preferred stock dividends offer a fixed payout. But instead of being taxed as ordinary income, preferred dividends are typically taxed at the long-term capital gains rate, just like dividends from stocks.

And like bonds, if you buy into a preferred at or below par value or its call price, then you'll be made whole on your investment when it's eventually redeemed.

Preferreds often sport higher yields than a company's common stock and bonds. And the issuer also has a greater obligation to pay preferred shareholders before common stockholders---hence, their "preferred" status.

Although preferred shareholders don't participate in a stock's upside like common shareholders do, they tend to avoid the sharp drops that common stockholders must endure during bear markets.

In the fixed-income sleeve of our Income Portfolio, we hold three preferred stocks: AES Corp. 6.75% Preferred C (AES-C), Connecticut Light & Power $3.24 Preferred (CNLPL), and Pacific Gas & Electric 5.5% Preferred B (PCG-B).

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