A Potent Preferred Idea for Additional Income | ETF Trends

Preferred stocks are taking on added importance in today’s low-yield environment, but many recent preferred initial public offerings (IPOs) are reflecting the yield challenges income investors to face. The Principal Spectrum Preferred Securities Active ETF (CBOE: PREF) can help with that.

PREF offers high monthly income by targeting preferred securities that have historically offered higher yields than similarly rated bonds, allowing for a solution to diversify income streams. Preferred securities may also pay qualified dividends, which are taxed at a lower rate than ordinary income.

“For those income investors depending on their investments for income, the higher dividend of preferred stocks helps meet those income requirements,” according to Seeking Alpha. “Because all the dividends on preferred shares must be paid before any dividends go to common shareholders, preferred dividends are not only safer but carry substantially less price volatility than common stock. Therefore, preferred stocks are more suitable for conservative income investors and retirees.”

Like common stock, preferred stock is issued by a company and traded on an exchange. Preferred stock prices can fluctuate, but most of the returns from preferred stock come from dividends. Unlike common stock, preferred stock dividends are predetermined and paid at regular intervals. These dividends are paid in full before any dividends are released to common stockholders.

PREF for Income

Preferred stock is a class of equity security that typically pay fixed or floating dividends to investors and have “preference” over common stock, but they are subordinated to bonds. The issuing company must pay dividends to preferred stockholders before common stockholders, and in the event of a bankruptcy or liquidation of the company’s assets, must put the claims of the preferred stockholders ahead of the claims of the common stockholders.

“Today, most preferred shares have recovered materially off of their lows. However, many are still trading at very good discounts to par value,” according to Seeking Alpha. “Now is still a great time to continue building a preferred portfolio if you are an income investor. One of the major challenges of building a preferred portfolio is that some of them tend to be thinly traded. One way to diversify among preferred shares quickly is to consider a closed-end-fund or an exchange-traded-fund.”

Data also indicate active management, such as what PREF offers, can benefit preferred equity investors over the long haul because many passive preferred ETFs lag the Morningstar Preferred Stock Category over long holding periods.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.