We'd 'Prefer' to Look Elsewhere for Yield
Preferred stocks' high yields may be alluring to income-seekers, but investors should approach this space with caution.
With yield so scarce today, investors are branching out into different asset classes in the search for income. We’ve seen particularly large inflows into high-yield, corporate-bond, and REIT exchange-traded funds, some of which have doubled in size during the past year. Many investors have set upon preferred stock, which is a hybrid security usually issued by highly leveraged companies, such as financial institutions, telecoms, and utilities. Preferred stock has characteristics of both bonds and stocks. Like stocks, preferreds are traded daily on an exchange. Like bonds, they pay fixed income on a regular basis (usually quarterly) and do not benefit from earnings growth of the issuing company. In the capital structure, preferred stock is senior to common stock but junior to corporate bonds, and preferred shareholders have no voting rights.
The largest preferred stock ETF is iShares S&P U.S. Preferred Stock Index (PFF). PFF is about 5 times the size of its nearest competitors and has greater liquidity. This fund’s wide range of preferred stock (almost 300 different issues are included) can be a satellite addition to a diversified income-seeking portfolio, and many have embraced it: PFF grew its assets by more than 2 billion dollars this year. Preferred stock is a good diversifier: It has low correlation to other income-generating asset classes like REITs, master limited partnerships, corporate bonds, Treasury Inflation-Protected Securities, and popular income ETFs like Vanguard Total Bond Market ETF (BND) and SPDR Barclays Capital High Yield Bond (JNK).
Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.