The ‘Preferred’ Path to Higher Returns
Investors need to consider bond substitutes that can provide stability, safety and relatively attractive returns.
One such substitute is investment-quality preferred stocks. Preferred stock is a kind of hybrid security that sits between bonds and common stock in a company’s capitalization.
Preferreds are senior to common stock in terms of payment of dividends and claims on assets, but junior to bonds. Usually, preferreds have a fixed dividend (although some float with some fixed premium to short-term rates).
Preferreds are rated by the major credit-rating firms. Those offered by large companies carry investment-grade ratings but are rated lower than bonds because of their junior status. They do, however, have a substantial advantage over bonds for individual investors.
Bond interest is taxable at regular personal income-tax rates. Preferred stock dividends are generally taxable at long-term capital-gains rates, which under current laws are set at a maximum of 23.8% versus a maximum rate almost twice as high for interest income.Comment: Image source Wiki