Preferreds currently offer yields of 350 basis points over 10-year Treasuries and well above the 227 basis-point spread during the pre-financial-crisis period between 1997 through 2007.
While preferred stocks provide investors with an attractive source of yields, potential investors should keep in mind that the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk. [Evaluating Preferred ETFs Ahead of a Rate Hike]
Alternatively, investors may also consider the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) in a rising rate environment. Variable-rate preferreds usually trade mroe like bonds with shorter durations, so more conservative investors may find the lower-risk profile more appealing. However, VRP comes with a lower 4.57% 12-month yield. [The Right Preferred ETF Right Now]
For more information on dividend funds, visit our dividend ETFs category.
Max Chen contributed to this article.