Should I Own Any Preferred Stocks?

When considering investment options, many investors contemplate whether or not to include preferred stocks in their portfolio. Preferred stocks offer a unique blend of features that can appeal to certain types of investors. To help you decide if they are right for you, let’s explore what they are, their benefits and drawbacks, and their current yields in 2024.

What Are They?

Preferred stocks are a type of equity that pays fixed dividends and has a higher claim on assets than common stocks in the event of liquidation. They combine features of both stocks and bonds, offering a steady income stream like bonds while providing potential for capital appreciation like stocks. They generally do not have voting rights, unlike common stockholders.

Preferred stocks are often issued by companies to raise capital without diluting the voting power of existing common shareholders. They are commonly found in industries such as utilities, financial services, and real estate investment trusts (REITs).

Current Yields on Preferred Stocks in 2024

As of 2024, the yields on preferred stocks vary depending on the issuing company, the industry, and market conditions. Generally, preferred stocks offer higher yields than common stocks and bonds due to their hybrid nature. Current yields on preferred stocks typically range from 4% to 6%, though some can offer yields as high as 7% or more. These yields can be attractive to income-focused investors, particularly in a low-interest-rate environment.

Benefits of Owning Preferred Stocks

Steady Income: They pay fixed dividends, providing a predictable income stream for investors. This can be particularly appealing to retirees or those seeking regular income from their investments.

Higher Yields: They generally offer higher yields compared to common stocks and bonds, making them an attractive option for income-seeking investors.

Priority in Dividends and Liquidation: Preferred stockholders have priority over common stockholders when it comes to dividend payments and asset distribution in the event of liquidation. This provides a level of safety and security, particularly in financially stable companies.

Potential for Capital Appreciation: While they are less volatile than common stocks, they still offer some potential for capital appreciation, especially if the issuing company’s financial health improves or if interest rates decline.

Drawbacks of Owning Preferred Stocks

Limited Capital Appreciation: They generally do not offer the same potential for capital appreciation as common stocks. Their prices are more influenced by interest rates than by the company’s performance.

Interest Rate Sensitivity: They are sensitive to changes in interest rates. When interest rates rise, the prices of preferred stocks typically decline, as newer issues offer higher yields.

Credit Risk: They are subject to credit risk, meaning that if the issuing company faces financial difficulties, it may suspend dividend payments or default on its obligations.

Lack of Voting Rights: Preferred stockholders generally do not have voting rights, limiting their influence on corporate governance and decision-making.

Conclusion

Whether or not you should own preferred stocks depends on your investment goals, risk tolerance, and income needs. Preferred stocks can be a valuable addition to an income-focused portfolio, offering higher yields and steady income. However, they also come with limitations, such as limited capital appreciation and sensitivity to interest rates. nvestors should carefully consider these factors and evaluate their overall portfolio before deciding to invest in preferred stocks. Consulting with a Fee-Only financial adviser can provide personalized guidance and help you make informed decisions based on your financial situation and objectives.

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