High-yield alternatives: Preferred Stocks are an Easy Fix
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While “preferred stocks” can be a great income investment option, the word “stock” is often misleading. Although these “stocks” can be traded on major exchanges, they are primarily fixed-income investments, and many investors use Preferred as an alternative to CDs. Preferred stock dividend payments are determined when the stock is issued and generally do not change, with most falling due five years after the issue. If interest rates fall, a company can reclaim the shares and pay you the price they were issued. Many analysts agree that one of Preferred’s positives has been its relatively stable share price.
This stability comes from knowing the size of future dividends as long as hyip investment companies continue to meet all of their debt obligations. In contrast, in the case of common stocks, by contrast, companies can cut dividends without warning during troubled times. Generally, preferreds are subject to the same risk factors as bonds, such as inflation and rising interest rates. For the most part, when a company does not estimate earnings, that may affect common stock but not preferred stock.
However, something serious could affect a company’s creditworthiness, such as a downgrade, which could affect the preferred stock. Senior Notes are more accessible for the Individual Investor than individual Notes. Senior bonds can be bought and sold on major exchanges, not on the bond market, which is less liquid and transparent—the $1,000 price of most new corporate bonds.
Many preferred stocks have dividends that qualify for the qualifying dividend tax rate (15 percent for most investors) because dividends are paid in US dollars after tax. In contrast, others pay dividends that are taxed at the tax rate. Corporations write off these payments so that, from the IRS’s perspective, they more closely resemble the interest paid to corporate bondholders. Qualified dividends yield a little more than those, so invest them in tax-advantaged accounts like IRAs.
However, if the dividend is high enough after taxes, which is often the case, a G/L account is in order. The prospectus will indicate whether it pays qualifying dividends if you buy individual security.
