Mortgage REITs – Like The Yield But Not The Volatility, Here Is An Alternative

By Michael Terry:

As many readers are aware, I am a firm believer in the often overlooked asset class of preferred stocks. I have managed portfolios of them institutionally and own them in “retail” portfolios as well – including my own.

One of the aspects of preferred stocks that I like is the ability to move up the company’s capital structure from equities and increase the yield on the investment. For income portfolios, especially retirement portfolios, a known income stream is often more important than capital appreciation. Preferreds help accomplish these portfolio objectives in two ways (not always mutually inclusive):

  1. Preferred stocks allow investors to buy higher quality companies lower in the capital structure rather than lower quality companies higher in the capital structure.
  2. Due to the fixed dividend (in most cases, except floaters), the minimum yield is known in advance and volatility is somewhat lower as preferreds react mainly to rate occurrences

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