PREFERRED STOCK
A different type of ‘fixed income’
As we have established in past articles, it is difficult to get a steady monthly income stream from bonds. You can do that of course, but given the fact that bonds pay out twice a year, you need to get a half dozen issues in order to have a steady reliable source of income.
When you are building a fixed income portfolio with only bonds it takes some doing to structure enough bonds to pay a monthly income. If you are structuring your portfolio in an environment where interest rates are falling, you are bound to lose some bonds due to them being called. You may have the perfect bond portfolio until the Fed steps in and cuts rates by a quarter and suddenly your bonds are getting called.
Now you are left with a chunk of cash that you cannot reinvest at that same great rate, and you have to do it within the confines of your portfolio. You may have a hard time restructuring your portfolio to give you monthly income.
If you are an investor who needs monthly income and does not have the capital to buy six different bond issues, you may want to consider preferred stock. Preferred stock trades on the Big Board along beside its close cousin, common stock. Preferred stock has a greater claim on a company’s earnings as assets than does common stock.
In good times this means that when the company has extra money to pay out in terms of dividends it pays preferred stock holders first over common stock holders. It’s nice to be first in line to get the money, especially if the company is going belly up. Common stock holders are last in line to be paid.
Preferred stock gives you the stability of knowing when you will get a dividend and how much it will be. On the other hand you never know about common stock. For common stock the company’s board of directors has to get together to approve the deal, and it varies from dividend to dividend.
Preferred stocks dividends are virtually guaranteed. If a company misses a dividend payment they are required to make up that payment before paying out another dividend. That right there is enough to earn the stock the label of fixed income. Preferred stock prices are steady as you go, are completely liquid and trade on the New York Stock Exchange, or Big Board. Remember though, the dividends you receive are fully taxable so they do not enjoy the tax advantage or municipal bonds or US Treasuries.
In summary, preferred stock trades on the Big Board and is completely liquid. They usually pay out a steady reliable monthly income, and have claim over common stock holders for a company’s earnings and assets. Lastly, it is relatively easy and inexpensive to set up a income portfolio.
Good luck and happy investing.
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