If you’re looking for better returns for your capital, it may be high time to get involved with comparatively riskier investments, especially if you have a relatively stable portfolio that can buffer against possible losses. Although today’s market conditions may make these seem like unlikely investments with which to turn a profit, preferred stocks are projected to give investors good returns in the near future if market conditions cooperate.
It may be difficult to get good deals when it comes to bonds, as the difference between the yields of T-bills and securities that result in fixed income has virtually normalized after increasing to exceedingly high levels. However, the spread between preferred stock (a mix of equity and bond) and Treasury bills is almost 45% higher than the norm – you can still gain yields of approximately 7% if the prices of preferred stock stagnate in these conditions of slow growth.
Purchase preferred shares through diversified funds, as these shares can be quite volatile compared to bonds. The iShares Preferred Stock Index Fund can give you an above-average yield at 6.9%, says Global Trends Investments president Tom Lydon, although a large part of the holdings are investment-grade. You can also purchase PowerShares preferred stock, which yields 7.2%.
The problem with preferred stock is the possibility of bigger price drops compared to yields, if the economy gets into more of a slump than analysts expect. These stocks may also be troublesome if abrupt growth occurs as many of these are securities that take long to mature, making them more prone to loss should rates shoot up, according to Flaherty and Crumrine chairman Donald Crumrine.
Preferred stocks might not seem like a good purchase for those who seek more secure returns provided by comparatively more stable investments. However, you can help buffer against damage to your nest egg’s stability by buying these stocks via a diversified fund. Talk to your investment planner if you’re thinking of buying preferred stocks.