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):
- Preferred stocks allow investors to buy higher quality companies lower in the capital structure rather than lower quality companies higher in the capital structure.
- 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