An Ignored Investment With A 10% Yield… With Payments Every MONTH!
We’re always looking for fat Yields – RIGHT!?!
Whether it’s new dividend stocks, some high-yield ETFs, or even bonds and CDs.
Sometimes you need to look at investments that are being ignored.
What’s great is, I found a bunch… And they pay really big dividends, sometimes yields are almost 10%!
I’m talking about preferred stock.
You might not have ever heard of preferred stock, so let’s start with the basics.
When a company needs to raise money, they generally have three options: debt, common stock, and preferred stock.
Debt is just taking out loans from a bank and paying interest and principal, periodically.
Common stocks are shares on the stock market. A company can go public or issue shares to raise money. It’s permanent capital that sits on the balance sheet.
Preferred stock is sort of in the middle.
Let me explain.
When a company issues preferred stock, they agree to pay a dividend every quarter at a set rate. So, sort of like debt.
But preferred dividends are more reliant on company earnings than debt. So, preferred stock can also behave like common stock.
An example will make more sense.
Sun Life Financial (ticker: SLF) has preferred stock under the ticker SLFIF.
It currently pays 4.45% every quarter on $25 per share. So, for every share, you get about $1.11 in dividends each year.
But 4.45% is low, especially since risk-free CDs have rates only a little bit lower.
So the original $25 price dropped to $14.50 per share because of higher interest rates.
Which means the 4.45% dividend is actually over 7.5% if you buy it now.
7.5% dividend yield sounds a lot more interesting.
Another really important part of preferred stock is its callability.
What does callable mean?
Callable means the company can pay the preferred shareholders $25 per share at any point to buy back their shares.
Why would a company call back their preferred shares? Because if interest rates fall far below the original yield, the company wants to stop paying those dividends.
Since preferred stock will likely be called, the price of preferred stock rarely rises above $25.
Ok, so now we know a little about preferred stock. How do you pick them?
Well, you shouldn’t actually pick individual preferred stocks. Why?
Preferred stock is thinly traded. For example, SLFIF hasn’t had a trade in over 3 weeks!
Instead, people should buy ETFs that focus on investing in preferred stock.
That way, you don’t need to worry about sifting through individual preferred stocks… PLUS, you get the benefits of diversification.
Here are some of my favorites:
iShares Preferred & Income Securities ETF (ticker: PFF) is by far the biggest fund with over $13 billion in assets under management. PFF has a dividend yield of 6.7% and pays its dividends every month!
VanEck Preferred Securities ex Financials ETF (ticker: PFXF) holds preferred stock in industries outside of financials. Most preferred stock is issued by banks, so if you want to avoid financials, then PFXF is perfect for you. Plus, PFXF has a 8.2% dividend yield and it pays monthly!
Virtus InfraCap U.S. Preferred Stock ETF (ticker: PFFA) is an actively-managed fund in preferred stocks. PFF and PFXF are passively-managed and simply buy some of the most popular preferred stocks. PFFA will comb through preferred stocks to try to find the best deals. PFFA has the highest dividend yield at almost 10%, but you pay higher fees to the fund managers. PFFA also pays dividends monthly, but unlike PFF and PFXF, it also increases its dividend by about 2% per year.
Do you already own some preferred stock?
Email me back and let me know what shares you hold, and why!
Michael Jennings, Editor
Dividend Stocks Research
Category: Dividend Yield
