Have you ever heard of preferred stocks?
These types of stocks are a special class of stock that possess a higher claim to assets and also earnings when compared to common stock. So if a company were to go bankrupt, owners of preferred stocks would have a bigger claim to any assets or money recovered during the bankruptcy proceedings. These stocks also get preferential treatment when it comes to dividend payments, which is often why investors love them.
So why doesn’t everyone always buy them?
Or why aren’t all stocks preferred stocks? As is often the case, there is a trade off for getting to be first in line for dibs on dividends and assets. In this case it all comes down to voting rights. Corporations are democracies in the sense that shareholders get to vote but every stock is not necessarily given equal representation. When it comes to preferred stocks, in fact, they are given no voting rights at all. For the everyday investor this might not seem like such a big deal. However, for institutional investors and others trying to gain control of a company’s board, voting rights are essential.
Why should you consider buying them?
Preferred stocks will often pay fixed dividends. This make them a great option for people looking for stable income from their stocks. If you happen to be a retiree, for example, you should consider investing in preferred stocks and adding them to your portfolio. If you’re wondering how to buy preferred stocks, in most cases you’ll be able to buy them through your standard broker. You should, of course, get in touch with your broker to make sure that they offer preferred stocks. However, it shouldn’t be a problem for you to buy them.
Most of these stocks will pay fixed or sometimes variable dividends, and they will do so forever. While some companies will suspend dividend payments for their common stocks, this usually doesn’t happen with preferred stocks. This means you’ll be able to enjoy very stable income. You should know, however, that some preferred stocks are callable. This means that the company can recall the stocks, if necessary, at their own discretion. If this does happen, however, the company will normally pay a premium on the stock price so you’ll still make out with some big earnings.
The Preferred Stock Index Fund
If you’re looking for an easy way to add a variety of preferred stocks to your portfolio, you should consider a preferred stock index fund. With a preferred stock etf or similar instrument you will be able to enjoy the returns generated by high yield dividends, all while having the assets professionally managed. The best preferred stock mutual funds can provide steady, high-yield income all while keeping risks low. You should know, however, that professionally managed etfs carry fees with them. After all, financial managers won’t work for free, will they?
Buying preferred stock is a great option for just about every investor. You know who loves preferred stocks? Warren Buffet. Why? Dividend income. Warren Buffet has long been a huge fan of dividends, and preferred stocks often offer the best dividends out there. If you add some of the best preferred stock mutual funds or a preferred stock etf to your portfolio, you’ll likely be able to enjoy solid dividend stock income.
Finding them can be a little bit trickier then finding common stocks. As you can guess, common stocks are common, so you will be able to find them quite easily. The market for preferred stocks, however, is generally much smaller, and sometimes the markets themselves simply aren’t as liquid.
Dividends From Other Stocks
Preferred stocks are not the only types of stocks that offer income through dividends. In fact, many stocks offer dividends, especially older and more established stocks. If you would like to have some stable dividend income in your portfolio, but can’t find a preferred stock that you like, consider looking at other stocks that also offer dividends.
Tax and Dividends
Finally, when it comes to dividends there are a few things you should know. Income from dividends is taxed at the same rate as general income. So the money you get from your preferred stocks will generally be taxed more than money made off of other types of investments. Also, the rates of returns on some preferred stocks might not be all that much better than competing corporate bonds, which are themselves much less risky. For this reason, some investors prefer corporate bonds. Still, preferred stocks could be a very nice addition to your portfolio!
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