Preferred stocks represent a specific type of security with a pre-defined level of dividends paid to the shareholder. These assets generally come with priority over common stocks when it comes to receiving the payout. The name of the security does not necessarily mean they are preferred by the investor. So, what are preferred stocks and how do they work?
In this article, we will discuss some obvious hits and misses of this particular instrument. Additionally, we will discuss some baseline preferred stocks trading methods as well as provide a list of preferred stocks letting you choose the best one.
In some ways, these assets can be used similarly to bonds. They both have the same source of income for the shareholder, which is a dividend. Besides, both instruments come with a higher yield if compared to traditional securities and shares. The same way a bond, preferred stocks usually show better performance with a declined interest rate on the background.
Additionally, a company can specify a date when the stock can be “called” or redeemed even at a higher price. This is what makes the instrument quite unique taking into account some extra features such as the ability to convert this type of stock into common shares.
Unlike common stocks that are believed to be a good option to invest in in the long run, preferred stocks are a better option for short-term investors. This is due to higher fluctuation level meaning these assets have a lower potential to perform growth within a longer time frame. Here are some major pros and cons you need to consider before investing in this type of asset.
To trade preferred stocks, you need to become a secondary market participant. The main challenge here is that the asset price does not usually match par values. It means that one is not guaranteed to get the same amount he or she initially paid for the asset.
Regular dividends are the main reason why many investors are attracted to these assets. Besides, they have proved to be a reliable instrument to invest in since 1900 featuring the average return over 7% through all these years. At the same time, sometimes dividend payments are not guaranteed, which makes this instrument a bit risky depending on the dividend type you choose:
So, it is very important to decide on which type of dividends suits you the most and if you are ready to put up with missed or skipped payouts.
To choose the best preferred stocks from the biggest companies and issues, have a look at the list of 3 best offers:
|Symbol||ETF Name||Total Assets ($MM)|
|PFF||iShares Preferred & Income Securities ETF||$17,312.40|
|FPE||First Trust Preferred Securities & Income ETF||$7,484.39|
|PGX||Invesco Preferred ETF||$6,500.11|
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.