Should You be Considering Preferred Stocks?

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By Maurice Stouse,
Financial Advisor and Branch Manager

Investors have grown increasingly concerned about yields on their fixed income and more conservative investments. Preferred stocks, often overlooked, but obtainable through a brokerage account via many investment firms, are one option that they might want to consider now. The reason? Preferred stocks currently have yields between 5% and 6%. Today an investor can buy preferred stocks individually or through mutual funds or exchange traded funds.

It was a little more than a year ago that interest rates finally started to climb again. The Federal Reserve cited an improving economy and, thus, started shrinking its balance sheet (read that to mean decreasing the amount of cash in the system in the USA). The balance sheet had swollen to almost $4.5 trillion and it let it shrink (by not renewing or buying more bonds) to around $4 trillion. That was accompanied by a steady increase in the federal funds rate from near zero to somewhere between 2.25-2.50%. And most people thought that was going to be the trend for some time. In fact, one major U.S. banking executive predicted a 5% rate sometime this year or next. Of course, the world is a lot different in such a short period of time. Interest rates have softened. As a matter of fact, the 10-year U.S. Treasury actually now yields closer to a one-year Treasury. The result? Investors (needing or wanting to acquire more income or needing or to lower the risk to their portfolio) are left with choices that while lower risk or conservative, produce lower yields than investors need or want.

When adding conservative or fixed income investments, the least risky choices are savings accounts and CDs. Those are followed by Treasury bills and notes, money market mutual funds and finally fixed rate or fixed index annuities. Most of these types of investments produce in the 2-2.5% range. Right around or slightly behind the rate of inflation. This has many investors looking for more choices and these now include the attractive, but often overlooked, world of preferred stocks. Most preferred stocks today yield in the 5-6% range and can be held directly or through a mutual fund or exchange traded fund.

What are preferred stocks? They are stocks issued by companies and they carry a par (and maturity) value of $25. They also have a stated maturity. Many investors maintain that these stocks offer the best and the not so best of both the worlds of stocks and of bonds. A preferred stock can be considered a cross between a stock and a bond. The risk is higher than that associated with holding bonds (corporate bonds to be specific) but not as great as the risk that comes with holding a particular company’s stock.

“Preferreds” get their name because they are often considered to have priority to common stock in that dividends for many issues are paid to preferred shareholders before they go to the common shareholders. They also have preferred status with regards to exercising rights should a company undergo liquidation. In other words, the bondholders get paid first then the preferred shareholders and then the common stock holders.

Other preferred facts: The world of these stocks is somewhat smaller than that of common stocks, with about $250 billion circulating today. Preferreds offer daily liquidity because they trade like other stocks. Their prices however are more sensitive to the movement of interest rates but owners can also participate in the growth of a company as well.
Diversification is key. So, interested investors usually look to ensure that they have their risk spread among a number of sectors of the market. To find out if preferred stocks might fit your strategy, do your research or contact a financial advisor to learn more.

Maurice Stouse is a Financial Advisor and the branch manager of the First Florida Wealth Group and Raymond James and he resides in Grayton Beach. He has been in financial services for over 32 years. His main office is located at First Florida Bank, 2000 98 Palms Blvd, Destin, FL 32451 with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.
Securities offered through Raymond James Financial Services, Inc,. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. First Florida Wealth Group and First Florida Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Investing always involves risks and you may incur a profit or a loss. No investment strategy can guarantee success.
Holding stocks for the long term does not insure a profitable outcome. Diversification and asset allocation do not ensure a profit or protect against a loss. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly. An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although it seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.