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INCLINE VILLAGE, Nev. — In recent articles I've written how income investing is preferable to growth investing in this market environment. It was true then, and is even truer now. Why? The weak economy.
In an extraordinary move, the Federal Reserve said it will keep interest rates low for at least another two years. Most everyone expected rates to remain low, but the announcement removed any uncertainty and underscored its view that the economy will remain sluggish for some time to come.
Knowing rates will remain low, income vehicles like preferred stocks are in the sweet spot. A preferred stock is a “hybrid” security with characteristics of both stocks and bonds. For example, some preferreds represent ownership in a company, like a stock, but usually pay regular fixed dividends, like bonds pay interest. Most issues currently yield around 7 percent.
One can diversify among preferred stocks by buying the popular iShares Preferred Stocks ETF (PFF). As much as I like ETFs, one can do far better buying individual issues. Look for well top-rated issues that are at or below par value ($25) and have call protection.
Preferred stocks can decline if interest rates rise or there is a threat that the institution can't pay its dividend. With interest rates remaining low the risk is now limited to the quality of the institution. That is called credit risk.
Periodically market participants panic and sell preferreds thinking the dividend is at risk (we saw that on August 8). When calmer heads prevail people realize that companies like U.S. Bank or JPMorgan will indeed make their payments. That's why these issues, unlike the equity market, are already back to where they were before the crisis.
One of our newer holdings is PartnerRe Ltd., which just issued a new preferred stock, the 7.25 percent Series E, that has five years of call protection and pays qualified dividends. With today's volatile equity market and interest rates near zero, issues such as this one can play an important role in a portfolio.
— David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the position mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
In an extraordinary move, the Federal Reserve said it will keep interest rates low for at least another two years. Most everyone expected rates to remain low, but the announcement removed any uncertainty and underscored its view that the economy will remain sluggish for some time to come.
Knowing rates will remain low, income vehicles like preferred stocks are in the sweet spot. A preferred stock is a “hybrid” security with characteristics of both stocks and bonds. For example, some preferreds represent ownership in a company, like a stock, but usually pay regular fixed dividends, like bonds pay interest. Most issues currently yield around 7 percent.
One can diversify among preferred stocks by buying the popular iShares Preferred Stocks ETF (PFF). As much as I like ETFs, one can do far better buying individual issues. Look for well top-rated issues that are at or below par value ($25) and have call protection.
Preferred stocks can decline if interest rates rise or there is a threat that the institution can't pay its dividend. With interest rates remaining low the risk is now limited to the quality of the institution. That is called credit risk.
Periodically market participants panic and sell preferreds thinking the dividend is at risk (we saw that on August 8). When calmer heads prevail people realize that companies like U.S. Bank or JPMorgan will indeed make their payments. That's why these issues, unlike the equity market, are already back to where they were before the crisis.
One of our newer holdings is PartnerRe Ltd., which just issued a new preferred stock, the 7.25 percent Series E, that has five years of call protection and pays qualified dividends. With today's volatile equity market and interest rates near zero, issues such as this one can play an important role in a portfolio.
— David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the position mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
