Preferred stock an alternative to bonds

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.
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