“When my information changes, I alter my conclusions. What do you do, sir?” – John Maynard Keynes
We’ll, Mr. Keynes, I’d like to think I’m sufficiently flexible to alter my conclusions when my information changes.
My information has changed on interest rates. I simply don’t see them rising in the near future: GDP growth remains anemic and consumer-price inflation, as measured by the admittedly flawed CPI, remains low.
Most everyone in early January (and this is a warning I should have headed) expected interest rates to rise through 2014 on Federal Reserve QE tapering and accelerating economic growth. Few investors expected the below chart of the 10-year Treasury note yield to look as it looks in the waning days of May.
Because I’ve altered my outlook on interest rates, I’ve altered my conclusions on fixed-income investments. I like them. Let me be specific: not all fixed-income investments, but a few.
The Best Fixed-Income Investment
Preferred stocks are one of the few.
Many investors are unfamiliar with preferred stocks. This is understandable; the market is minuscule compared to the market for common stocks. Preferred stocks are also more popular among corporations than individuals. Preferred stocks are worth a look by the individual, nonetheless.
In short, preferred stocks are a hybrid of bonds and stocks. They’re like common stocks in that they pay dividends and their shares trade on the major stock exchanges. Many preferred stocks also pay qualified dividends, which means they’re taxed at the lower dividend-tax rate instead of the higher marginal tax income tax rates.
Preferred stocks are like bonds in that they are issued with a dividend-coupon based on par value. What’s more, dividends are contractual, just like interest on a bond. Like bonds, preferred stocks are rated by Moody’s and Standard & Poor’s.
Preferred stocks are safer than common stocks because they have a higher claim on the company’s assets. And in some instances, they’re nearly as safe as bonds. Because preferred stocks are only “nearly” as safe as bonds, they provide significantly higher yields than bonds – 6% and 7% are the norm.
Preferred stocks have a few more moving parts compared to common stocks: Most preferred stocks have a call date, where the issuing company can redeem the preferred stock. A call date doesn’t mean an issue will be called, it means it can be called. But if a preferred stock is trading above par value, normally $25 a share, a loss can incur if the issue is called.
For these reasons, preferred-stock funds are the best bets for most individual investors. A fund assures no income disruption should an issue be called. This is an important benefit for income-dependent investors. What’s more, risk is reduced through a diversified holding of different preferred issues.
Most income investors aren’t sacrificing much for these benefits. Preferred-stock funds yield between 6% and 8%. In addition, a portfolio of preferred stocks with differing dividend-payout dates enables many funds to pay income monthly instead of quarterly. This is yet another benefit for an income-dependent income.
On Friday, I’ll offer my top preferred-stock funds to buy now.
Organize Your Dividends With One Step
Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out – and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12 month dividend stream to ensure income all year long. Click here to see the full details of the Dividend Calendar…