Preferred Stock: A Good Thing to Own in a Market Correction
This last week reminded investors how nerve-wracking a market correction can be.
In truth, it’s far too early to freak out or to claim that this is the beginning of a larger downturn. We’ve seen several big dips in the major indexes since the end of the Great Recession – none have brought an end to this historic bull market.
Still, the recent sell-off has sent many investors searching for an asset that provides stability and income in choppy markets.
As you can see from this week’s chart, preferred stock fits the bill nicely.
A Good Yield, a More Secure Position and Less Risk
The S&P U.S. Preferred Stock Index (Nasdaq: PFF) barely flinched in the last week, while the S&P 500 plunged 6%. The Preferred Stock Index also sports an attractive 5.7% yield. It paid out $0.19 per share in the midst of this correction, allowing shareholders to incrementally increase their holdings.
Chief Investment Strategist Alexander Green wrote about the benefits of preferred stock back in 2012 – another period of market choppiness…
Preferred shares are hybrid securities with the properties of both stocks and bonds. They generally carry no voting rights but have a dividend that has priority over the common stock. (Hence the “preferred” label.)
The benefits of preferred shares are that you get a good yield, a more secure position than common stock holders and, in these uncertain times, less risk.
Of course, preferred shares still fell in the financial crisis. But they dropped only two-thirds as much as the S&P 500. They also rebounded more strongly during the recovery.
It turns out Alex’s words ring just as true today as they did in the uncertain trading sessions six years ago.
Picking the Right Preferred Stocks
Like any equity investment, preferred stocks aren’t entirely risk-free. These hybrid assets share many properties with bonds, including a degree of interest rate sensitivity and a risk of dividend nonpayment in the event of bankruptcy.
In other words, if you really want to take full advantage of the unique properties of preferred stock, you can do better than the broad market index. The right preferred stock selections can enable you to capture the benefits of these assets while minimizing your risks. It’s an opportune time to buy the right preferred shares.