Any investor wants investments that deliver outstanding results. One investing option you may want to consider is preferred securities, which are like stocks and bonds but offer much more. They are also referred to as “preferreds” and are considered hybrid investments, sharing characteristics of both stocks and bonds.
Aggressive investors often target them because these securities can deliver higher yields than other investment options. This guide will dig deeper into preferred securities, explain the different types, and try to help you determine whether these are right for your portfolio.
An Overview of Preferred Securities
A preferred security can be volatile like a stock. Companies that offer them can halt dividend payments; they can do the same with stocks. Here’s what to keep in mind:
- Like bonds, they provide scheduled coupon payments and have par values that are paid back at maturity.
- Shareholders are eligible for fixed preferred payments if the securities mature or are redeemed by the issuer.
- Preferred payments are generally issued before a company’s stocks but after its bonds.
- These securities can have maturities of 30 years or longer, or no maturity date.
- Their prices tend to fluctuate in the secondary market.
- They are less risky than junk bonds but offer comparable yields.
- They conversely carry higher credit risk than corporate bonds but offer higher yields to account for the additional risk.
You should weigh the pros and cons of preferreds closely before investing in them. They aren’t for everyone, so it can be wise to get expert advice for help in making an informed investment decision.
Reasons to Choose Preferred Securities
Preferred securities can deliver immense value to some investors, but are they right for you? Investors often choose them other investment options because they have:
1. Attractive Yields
They can contain wider credit spreads and pay a higher return than many of their counterparts. They tend to offer more income-generating power than equities and comparable options.
2. Tax-Advantaged Income
There may be instances in which they pay qualified dividend income (QDI). This income is taxed at the lower capital gains tax rate, in contrast to the rates associated with fixed-income investments.
3. Investment Quality
Industry-leading companies issue them with high investment grades. These securities represent quality investments since proven businesses back them.
You should evaluate preferred securities carefully to determine any risks that might outweigh these benefits. It’s also a good idea to compare them against the other investment options at your disposal.
Types of Preferred Securities
Preferreds can be complex, regardless of whether you’re a first-time or experienced investor. A clear understanding of the different types can help you make an investment decision that works for you. All preferreds are securities, but they vary in how they work. Common options include:
1. Preferred Stocks
A preferred stock gives you ownership in the issuing company. It differs from a common stock since it provides a fixed par value. Preferred stocks also have dividends that can be suspended at any time and are usually not cumulative.
2. Hybrid Preferred Securities
These include capital trust securities and junior subordinated debentures. They have interest payments that can be deferred and either cumulative or non-cumulative.
3. Baby Bonds
Baby bonds, sometimes called senior notes, pay interest like bonds. But these securities — unlike bonds — can be traded on an exchange and have a typical par value of $25.
There is no need to dive head-first into preferred securities, but your research might reveal them to be a great choice to achieve your investing goals. As you weigh these investment options, consider consulting with a financial planning expert to map out the right approach carefully.
Tips to Evaluate Preferred Security Options
Investors searching for higher yields during a time of low interest rates might be considering preferred securities as an attractive option. It’s essential to do an in-depth evaluation of them, though, as you would with any other investment.
Your research should account for key features of preferred securities, including:
1. Payment Options
Find out if a preferred security makes payments in interest or dividends based on its par value. These payments may be made monthly, quarterly, or semi-annually. They can be provided at fixed, floating, or adjustable rates.
Deferred or missed payments on cumulative preferred securities usually accumulate as obligations of the issuer and must be paid out before common shareholders receive their dividend payments. Payments for non-cumulative options do not accumulate as obligations of the issuer, which means shareholders are not entitled to receive missed payments.
3. Maturity Date
A preferred security has a designated maturity date. But the issuer may have the option to extend this date multiple times.
4. Early Redemption
They can have optional, mandatory, or conditional early redemption or call provisions. These enable the issuer to redeem the securities before a designated maturity date or at other times.
Convertible preferreds may be exchanged for a specified amount of a different security. There are often provisions attached to them that limit when they can be converted.
How they are taxed varies. It is essential to review the taxation section of the offering documents to learn about taxation.
They can provide greater yields than traditional securities. The higher the yield, the greater the risk associated with it.
You don’t have to be an expert investor to evaluate all the options. The above can give you a good start on making a comprehensive assessment of the value of these securities so you can feel confident in your investment choice. There are also options if you need extra help in making your evaluation. A preferred security expert can review your investment objectives and offer honest, unbiased assistance.
Contact an Expert With Questions About Preferred Security Options
The investment management professionals at Bogart Wealth can help in your quest to find suitable preferred securities or other investing opportunities. We employ a diverse team of independent advisors who have a fiduciary responsibility to keep your best interests at heart. They have the proven ability to assess your investing goals and offer a comprehensive personalized strategy to help you achieve them.
We are happy to meet with you and offer investment management guidance. Contact Bogart Wealth today to schedule a consultation with one of our advisors.