How Preferred Stocks can benefit a Portfolio

A major challenge for most investors is finding areas that can provide them with stability and income. The volatility in the stock market (over the last few years) has forced a number of individuals to rethink their retirement strategy. In this case, they want to find areas that can protect them against a host of events and receive consistent amounts of cash flow. One area that has been brought to the forefront is preferred stocks. These are securities with a higher class of ownership (in the event of liquidation). The biggest advantage is they will pay dividends prior to any common stockholders. This means that the income from these investments is more stable in comparison with other asset classes. To fully understand how preferred stocks can benefit a portfolio requires looking at the long term benefits.

The Long Term Benefits of Preferred Stocks

There are several advantages associated with investing in preferred stocks to include: price stability / income, liquidity and low investments per share. Price and income stability are one of the most common characteristics of preferred stocks. This is based upon the higher asset class distinction for this category. At the same time, there is a focus on ensuring that investors receive some kind of protection against volatility. For example, GE Capital preferred shares have a 52 week trading range $28.24 to $24.05 and they are paying a 5.21% dividend. This is higher than the common stock for GE (which has a trading from $21.65 to $14.02 and there is 3.60% yield). As a result, preferred stocks have higher amounts of income and greater stability.

A second benefit of preferred stocks is liquidity. What makes this area so advantageous is investors do not have to keep their money tied up in them for long periods of time. Instead, these kinds of securities are trading in the markets just like common stocks. This means that if an investor needs access to the cash right away. There will be no penalties associated with selling the position. Over the course of time, this is providing greater amounts of flexibility by: helping investors to adjust with changes that are taking place in the economy and their personal lives.

A third major advantage of preferred stocks is they are low priced securities. This means that investors do not have to pay over $100.00 per share to purchase these areas. Instead, they are trading below $50.00 (which increases the total amounts of leverage). This makes it easier to hold larger portions of this asset class (increasing the dividend yield for the portfolio).

There are a number of distinct benefits associated with investing in preferred stock. The three most common advantages include: price stability / income, liquidity and low prices per share. The combination of these elements, are helping to make these areas more attractive to conservative investors. They are looking for higher returns without increasing the risks. In the future, these benefits will continue to appeal to wide range of investors (who are becoming more conservative about how they are planning for their future).


Filed Under: financial educationInvestingUncategorized

Tags: , , ,

  • Preferred stocks provide
    reasonably regular and stable income as preferred stock dividends are fixed. And
    also preferred stockholders have a preference over common stockholders in
    income and assets.