Like a common stockholder, you are a partial owner of the business. But rather than hoping for increasing dividends, preferred shares have an agreed-upon dividend rate that can be two or three times as high as a typical stock dividend.
You give up any price appreciation there may be in the stock, but you can earn a 5%-6% yield with a preferred… compared with 2%-3% for regular shares.
Now, if you were a bondholder, the company would pay you each interest payment or risk default. Preferreds don't have the same guarantee. A company can suspend its preferred dividends. But this rarely happens… And the company is barred from paying any dividends on common stock until it meets its preferred-dividend obligations.
As a rule of thumb: If you find a stock with a safe dividend, you can bet that the preferreds are even safer.
This arrangement is why preferreds are described as a cross between a stock and a bond.
The great thing is that even in worst-case scenarios, preferred shares are safe. They tend to hold their value… and quickly bounce back.
If you need to generate income today… at yields that are higher than what a bond pays and still have a measure of safety… then preferreds are a great investment.
If you want to get started, there's one last thing to note… When you go to purchase a preferred share, they aren't always easy to find on your broker's platform. Each brokerage has a different format for the ticker. If you have trouble finding the one you want, call your broker and ask for the symbol – then place your order online (to avoid the fees of ordering over the phone).
This extra step might put some folks off… And that's a good thing. If people don't want to make the effort, fewer will buy preferreds, keeping prices down.
Preferreds offer a higher interest rate, long-term security, and steady payouts. This "odd duck" investment is the perfect way to guard your portfolio in the face of uncertainty today.