Wed. Mar. 17, 2010

Increasing Dividend Yield Part III: Preferred Stock *

This is the third installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio’s overall yield-on-cost. Last week we looked at REITs. This week we are looking at Preferred Stock.

Preferred stock is a special equity security that has properties of both equity and debt. Terms of the preferred stock are stated in a “Certificate of Designation” and all are unique to each security. However, there are some generalities. In the order of payments, preferred stock normally has preference to common stock, but are subordinate to bonds. Preferred stock usually has no voting rights, but some have a convertibility feature into common stock. Like bonds, preferred stocks are rated by the major rating agencies such as Moody’s and S&P. The rating for preferred stock is generally lower since preferred dividends do not carry the same guarantees as interest payments from bonds, thus offer yields that are higher than bond market yields and common stock yields.

Given the unique nature of each individual preferred stock and the time necessary to research them, many have opted to place their preferred investments in funds. Consider the following preferred stock funds:

iShares S&P U.S. Preferred Stock Index (PFF) – Yield: 7.79%
The iShares S&P U.S. Preferred Stock Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P U.S. Preferred Stock Index.
– Total Assets: $3.3 billion
– Expense Ratio: 0.48%
– Holdings: 88% Financials, 5% Consumer Discretionary, Consumer Staples 2%, 5% Other
– Distributions: Monthly

PowerShares Financial Preferred Profile (PGF) – Yield: 8.59%
Tracks the performance of U.S. listed preferred stocks of preferred stocks issued in the US market by financial institutions and currently includes approximately 30 securities selected by Wachovia pursuant to a proprietary selection methodology.
– Total Assets: $1.5 billion
– Expense Ratio: 0.60%
– Holdings: 100% Financials
– Distributions: Monthly

PowerShares Preferred Portfolio Profile (PGX) – Yield: 7.91%
The Index is designed to replicate the total return of a diversified group of investment-grade preferred securities.
– Total Assets: $885.5 million
– Expense Ratio: 0.50%
– Holdings: 83% Financials, 17% Utilities
– Distributions: Monthly

Two additional ones to watch are SPDR Barclays Capital Convertible Bond (CWB) and SPDR Wells Fargo Preferred Stock ETF Profile (PSK). They were started in 2009, so there is very little historical data to look at. In addition, there is also Nuveen Quality Preferred Income (JTP), which is an exchange traded note (ETN) administered by JP Morgan. ETNs are linked to the performance of a market benchmark. ETNs are not equities or funds and they carry additional risk compared to an ETF. If the underwriting bank bankrupts, the value of the ETN will be eroded.

I currently do not hold any preferred stock (individually or in funds), but I am giving consideration to the funds listed above.

Full Disclosure: No position in the aforementioned securities. See a list of all my income holdings here.

(Photo Credit)

7 Responses to “Increasing Dividend Yield Part III: Preferred Stock *”

  1. Larry McNary says:

    Dear Sir:

    Thank you for your excellent and informative article on preferred stocks. After reading your article, I realized I had a number of questions:
    1. Is the income from preferreds taxed the same as common dividends?
    2. Is the income from these preferred funds taxed the same as the income from preferred stocks one might buy directly?
    3. Do you have any references to books or articles one can obtain to learn more about preferred stocks?

    Thank you in advance for any helpful insights you can give.

    Best regards,

    Larry McNary

  2. TMT says:

    After looking at several of the preferred ETF’s I decided on PFF.

    My current YOC is 8.67%.

  3. D4L says:

    Larry: I am not a tax expert and my opinions on Preferred Stock is based on what I have read. With that said, I have read that the taxability of preferred stocks in and out of funds is similar to common stock. I have just started looking at preferreds, so I don’t have a book to recommend at this time.

    Best Wishes,

  4. follower of D4L says:

    D4L you are the best brooker

    can you publish all the stock you have on this site?

  5. D4L says:

    follower: I only list my income holdings on this site (http://dividendsvalue.com/holdings/dividend-stock-and-etfcef-holdings/). It would not be appropriate to list non-income and besides, I don’t need another job. :)

    Best Wishes,

  6. JAFCO says:

    You refer to your income holding above. However it is dated Feb 29, 2008. Do you have an up to date listing?

  7. D4L says:

    JAFCO: I am not sure what the Feb 29, 2008 date is. The information is updated each month. When I click on the holdings (http://dividendsvalue.com/holdings/dividend-stock-and-etfcef-holdings/) it is showing last updated 3/26/2010.