I think investors in search of income should consider preferred stocks. Many preferred stocks pay larger dividends than common stocks — and they offer a higher degree of reliability and safety, suggests Jim Powell, editor of Global Changes & Opportunities Report.
Preferred stocks can be thought of as hybrids of common stocks and bonds. In the unlikely event of a bankruptcy, preferred stockholders have a higher claim on a company’s assets than common stock investors — but are in second place to bondholders.
Like bonds, a preferred stock’s dividend is defined — and it doesn’t depend upon how well the company is doing at the time. Although the dividends are not guaranteed, companies that offer preferred stock are loathe to tarnish their reputations by not paying what they promised.
On the downside, the capital gains from preferred stocks usually lag those from common stocks. However, that should not be important to investors who place a premium on income.
Many companies that offer preferred stocks will issue a series of them with different interest rates, prices, and conditions. The choices can be confusing — which is the main reason that preferred stocks have not been popular with most investors.
The solution to the confusion is to invest in a highly diversified preferred stock fund. I think the best of the group is the iShares U.S. Preferred and Income Securities ETF (PFF).
The fund tracks a broad index of preferred stocks that are listed on the NYSE — nearly all of which pay fixed dividend rates. Holdings include issues by many of America's top blue chip companies.
Thanks to the bear market that pushed its price down, PFF is currently paying a 4.88% dividend. The attractive payout — plus a very low risk of failure — is a tough combination to beat for investors who are looking for a reliable source of monthly income in uncertain economic times.
