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Capture
11% Yields with Preferred Securities |
Published:
April 28, 2008
Wachovia Bank (NYSE: WB) extended an intriguing offer late last
year. The bank asked investors to lend it money by purchasing
its preferred stock and promised a juicy 8% yield in return. The quarterly payments
qualify for the reduced dividend tax rate,
and they're secured by an investment-grade credit rating from
both Moody's and Standard & Poor's.
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Tempted? With stocks in a slump and bond yields at their
lowest level in years, yield-hungry investors are scratching
their heads in search of a safe place to park their money. Stock
market volatility has been extremely high,
but preferred stocks like Wachovia's offer income investors the
best of both worlds -- a safe income stream and a relatively
stable share price.
Why Now?
But Wachovia isn't the only financial firm looking to raise some
much-needed capital by issuing preferred stock. Hurt by bad
mortgage bets, other cash-strapped banks are shoring up their
balance sheets by offering billions of dollars in preferreds.
These include names like Citigroup (NYSE: C), Merrill Lynch
(NYSE: MER), Bank of America (NYSE: BAC), and Washington Mutual
(NYSE: WM). Government agencies like Fannie Mae (NYSE: FNM) and
Freddie Mac (NYSE: FRE) and homebuilders like Toll Brothers
(NYSE: TOL) are also doing the same.
The increased supply of new preferred stock flooding the market
is sending their share prices lower. And since share prices and
yields move in opposite directions, the supply surge is also
lifting yields to historically high levels. Preferred
stocks enjoy a whopping 7.4% yield on average according to the PreferredsOnline Index, and many sport yields in the
double digits.
Falling interest rates are another plus to holding preferred
stock. Like bonds, preferreds tend to rise and fall with
interest rates. When interest rates rise, preferreds tend to
lose value against competing investments that offer high yields.
But in today's low interest rate environment, with corporate
bonds yielding about 5%, high-quality preferreds are the way to
go.
For the risk-averse investor, preferreds can also be preferable
to high-yielding stocks because payouts are more secure than
common share dividends. Preferred shareholders have a claim to a
company's assets ahead of common shareholders -- that's why
they're called "preferred." In other words, if a company ran
into trouble, it must pay preferred dividends before
common-stock dividends. And unlike common dividends,
preferred payouts are predictable -- they don't go up and down
with a company's earnings.
The fixed payments also tend to make share prices on preferred
stocks far less volatile than common shares. In fact, since
being issued in December 2007, Wachovia's preferred shares (NYSE:
WB-PS) have been half as volatile as the common shares.
But before you dive into any investment, it's important to check
out the fine print. That rule applies even more so to preferred
stocks, as there are several options available to preferred
investors. . .
Important Note: In the
remainder of this article,
High-Yield Investing
editor Carla Pasternak explains in full detail exactly what
income investors should look out for before purchasing preferred
stocks. She also provides a list of nine of the best preferreds
on the market -- with some offering yields as high as
11.0%. Even better, Carla serves up in-depth profiles of her
two favorite preferred issues. However, in order to view the remainder of this
article, you'll need to subscribe to our premium income-investing
newsletter --
High-Yield Investing. After you subscribe, you'll
receive immediate access to this full article, as well as our
monthly
High-Yield Investing newsletter and a host of
additional premium content. Please visit one of the following
links to continue.
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Income Security
of the Month
Our "Income Security of the Month" for May 2008 invests in
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delivered total returns of +297.3% since 2003, and
it ranks in the top 10% of its category over the past decade.
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