During the market meltdown in late 2000/early 2001, we started looking for alternative investments that would give us a more stable return. We decided to move about five percent of our portfolio from common stocks to preferred stocks. Preferreds generally pay a guaranteed, relatively high dividend, but the appreciation potential is limited. One of the preferreds we purchased was Royal Bank of Scotland. We paid $25.19 per share. The stock is currently trading for $25.45 – a whopping 1% return over five years. However, during that time we received $10.00 ($2/year) in dividends – a 7.9% annual yield. The S&P500 ETF (SPY
) returned -2.6% with an average annual yield of 1.3%.
When the market is flat, preferred shares are a good way to boost yields. However, as with any investment, it’s important to research the stock. I usually look for the following when researching preferred stocks:
- Companies with good credit ratings from Moody or S&P.
- Higher trading volume of the preferred stock.
- A call date of at least two years in the future.
- A dividend eligible for the 15% dividend tax rate.
By moving a small portion of our portfolio to preferred stocks we’ve boosted our overall returns over the long term. However, because of their limited appreciation potential, preferred stocks can drag down a portfolio in a surging market like 2003.
Linked at Outside the Beltway.