An ETF for Preferred Yields

11/17/2016 7:00 am EST

Focus: ETFs

Jim Powell

Principal Analyst, Global Changes & Opportunities

I have been stressing for over a year that the alternative to low fixed income returns is to invest in blue chips that pay attractive dividends, asserts Jim Powell, editor of Global Changes & Opportunities Report.

Investors who need more income than is usually available from blue chips should consider preferred stocks, an investment that is too often overlooked.

Many preferred stocks pay well over 6%, and they do so with a high degree of reliability and safety.

Preferred stocks can be thought of as a hybrid of common stocks and bonds. Like bonds, the dividends on preferred stocks are defined – and they don’t depend on how well the company is doing.

In the unlikely event of a bankruptcy, preferred stockholders have a higher  claim on a company’s assets than do common stock investors, but are in second place to bonds.

Many companies issue preferred stocks that are as easy to buy and sell as common stocks. Preferred stocks also cost much less than bonds.

On the downside, there are no dividend guarantees with preferred stocks. However, the companies that offer the stocks are loathe to sully their reputations by not paying what they promised.

However, if interest rates go down, a company that issued a preferred stock may call it in and reissue the stock at a lower rate. With interest rates already circling the drain, the recall threat appears to be quite low.

Many companies that offer preferred stocks will issue a series of them with different interest rates, prices, and other factors. Investors often find the choices confusing.

Fortunately, there is an easy solution to the choice problem: invest in a preferred stock fund that has the added advantage of being diversified.

I think the most attractive of the lot is the iShares U.S. Preferred Stock ETF (PFF), which tracks a broad index of preferred stocks that are listed on the New York Stock Exchange, nearly all of which pay fixed interest rates.

Holdings include issues by Allergan PLC, Wells Fargo, HSBC Holdings, Barclays Bank, GMAC Capital Trust, and Citigroup Capital – to name only a few.

The fund’s current yield is an attractive 5.70%, which is three times what the Treasury pays on its 10-year bonds.

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By Jim Powell, Editor of Global Changes & Opportunities Report

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