Preferred stocks yielding 6 percent plus

By Daren Fonda
Posted on October 26, 2016

An aura of income is all it takes to lure investors to dividend-paying stocks these days. But if payouts on common stocks don’t hold much appeal to you, consider a company’s preferred shares.

Even with their prices hitting 52-week highs, many high-quality preferreds still yield 5 percent or more. These stocks may not have much potential for gains after running up in price this year. But they should still generate more income than many other yield-oriented investments, including government bonds (1.5 percent for 10-year Treasuries), property-owning real estate investment trusts (an average of 3.6 percent) and utilities (3.4 percent).

Preferreds straddle the gap between stocks and bonds. Like stocks, they trade on exchanges. And like bonds, they make regular, though fixed, payments to investors. But bonds pay interest, while preferreds pay dividends, typically every three months. Many preferreds pay so-called qualified dividend, which can be a tax benefit: The top federal tax rate on those payouts is 15 percent, compared with a top rate of 43.4 percent on interest income.

However, most experts don’t see a big rise in bond yields anytime soon. On the other hand, interest rates could spike if inflation becomes more of a concern down the road.

Stocks to consider

For access to a diverse package of stocks, consider the iShares preferred ETF. It holds more than 280 preferreds issued mainly by banks, real estate firms and insurance companies. Most of these firms carry investment-grade ratings, although the ETF does own some with lower ratings. Its annual expense ratio is 0.47 percent.

KKR’s profits can still be erratic. But its preferred dividends look solid. Analysts expect KKR to earn $394 million this year, providing ample coverage for its payout of $15.8 million on preferred shares. The dividends aren’t cumulative, and they don’t qualify for the 15 percent tax rate. But KKR can’t redeem the shares until September 2021.