Chances are, you’re overlooking an entire class of safe, high-yield stocks…These stocks have dividend yields averaging 5.7%. Yet very few retail investors own them.That’s a shame. It means you’re probably leaving a lot of (predictable) money on the table—a thought income investors should cringe at.If you haven’t figured it out already, I’m talking about preferred stocks, the bond-like cousin of ordinary “common stocks.”As I’ll explain shortly, today’s interest rate environment makes now a great time to buy preferred stocks.
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The Nuts ’n BoltsThere are two main types of stock: common and preferred.When you own preferred shares, you own a slice of the company. And the value of that slice—the share price—can go up or down over time. It that sense, it’s just like owning common stock.However, preferred stocks also pay a fixed dividend. This makes them a bit like bonds. (More on that in a moment.)Note that not all publicly traded companies issue preferred shares. It’s most common among banks and other financial firms.Also, you don’t need to jump through any special hoops to buy preferred shares. They’re accessible through an ordinary brokerage account.
The Low-Volatility AdvantagePreferred stocks tend to be much more stable than common stocks. This is a key advantage, especially for income investors looking to minimize surprises.Take a look at Bank of America’s preferred and common shares over the past year, for instance. Its preferred shares (the green line in the next chart), fluctuated a lot less than its common shares (the black line).
Dividend Yields in the 5%-plus RangePreferred stocks also offer much higher dividend yields than common stocks.Take the iShares Preferred Securities ETF (PFF), for example. It’s a good proxy for preferred stocks in general.As you can see in the table below, PFF’s dividend yield is almost two-thirds higher than the yield on the iShares Select Dividend ETF (DVY), our proxy for high-dividend-paying common stocks.PFF’s yield is also over three times higher than the yield on the S&P 500.
On top of that, preferred stock dividends are also safer than common stock dividends.Let’s circle back to our Bank of America example.At the moment, Bank of America common stock pays a dividend of $0.60 per share. Now, say the company hits a rough patch and cuts that dividend.This would be bad for investors holding common shares. But it wouldn’t affect those holding preferred shares.Remember, preferred stocks pay a fixed dividend, usually every month or quarter. Again, this makes them a bit like bonds. And the company has to satisfy these payments before it pays a dividend on its common stock.