Investing in Preferred Stocks

Why Preferred Stocks:

The dividends you receive from preferred stocks are generally higher than what bonds are paying and can be a good alternative to holding bonds.  They also can have significant gains if you have participating preferred stock, convertible preferred stock, or preferred stock that has dividend arrearages that are paid back in the future.  Here is a good explanation of preferred stocks.

In December of 2018 I decided that the Federal Reserve would raise interest rates 1 or 2 times more.  I purchased many preferred shares that were paying 7.5% to 8%.  Since common stocks were under pressure and the market averaged about 8% to 9% rate of return per year over the longer time periods and these preferred stocks were trading slightly under the issue price of $25 I figured it was a good time to invest some of my IRA money in these stocks.  It worked out better than I thought since the price has increased by 10% in addition to the dividends and I have a more stable investment than common stocks.

If you follow interest rates there are many times you can make some significant capital gains on preferred stocks and of course convertible preferred stocks can go up in value based on what the common stock does.

Also, I have made some significant gains in buying preferred stocks that had dividend arrearages.  In one case I bought a preferred for $9 that had $7.50 in dividend arrearages and two years later sold it for $49 and collected the dividend in arrears and a current dividend of $4 dollars a year for two years for a total profit of $55.50 on my $9 dollar investment.  I also had another preferred stock that I made a very similar profit on it.

Many experienced investors overlook the preferred stock investments.  Schwab has a screener set up just for preferred shares that I continually check for good deals.  I generally only invest in preferred stocks that have cumulative dividends, if they stop paying you are first in line for any dividend resumptions and payment of skipped dividends.