With the Federal Reserve ratcheting up interest rates, preferred share prices have tumbled. The lower prices offer the chance to lock in excellent yields of 10% or even more – all from secure dividends.
However, there are some crucial features of preferred shares that you need to understand first.
Let me show you how to lock in safe and high income for years to come…
Preferred shares get the name because they have preference over common shares. This feature makes the first analysis step easy. If the issuing company is paying dividends on its common shares, the preferred share dividends are 100% secure.
A preferred stock has a par value (typically, but not always, $25.00) and a coupon rate based on the par value. For example, the Invesco Mortgage Capital Preferred C (IVR.PC) shares have a 7.5% coupon rate. This rate means these preferred shares pay a dividend of $0.466 each quarter. The dividend rate is fixed and will not change.
The current yield is the dividend rate divided into the current share price. As I write this, IVR.PC trades for $19.86, giving a current yield of 9.4%. To repeat, the 7.50% coupon rate you see when researching is based on the $25.00 par value. The current yield is based on the current share price.
Preferred shares become callable at some point in time. The IVR.PC IPO was issued on August 10, 2017, and the shares become callable on September 27, 2027. If called in, investors will receive the $25.00 par value.
It is important to understand that whether to call in a preferred issue is entirely at the discretion of the issuing company. Just because a preferred becomes callable doesn’t mean it will be. When you buy preferreds, please don’t count on them being redeemed for $25 on the call date.
Invest in preferred shares for the secure, high-yield income stream with the understanding they may be perpetual. If you want out, you will need to sell your shares for the current market price. Preferred shares act like bond prices. When interest rates go up, share prices go down. If interest rates fall, preferred share prices will increase.
The website Stock Market MBA has a page listing 587 preferred stocks—that’s a lot from which to choose. The page provides detailed information such as issue dates, call dates, coupon rates, current yields, the sponsor company, and the size of the IPO. If you like to do research, this webpage is a great resource.
In this interest rate environment, you can find solid preferred stocks with yields in the 8% to 10% range. These shares let you lock in those yields for as long as you want to hold the shares.
My recommended preferred stock ETF is the Virtus InfraCap U.S. Preferred Stock ETF (PFFA). This fund pays monthly dividends and currently yields more than 10%.
