The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: dividendman on January 27, 2015, 11:39:40 PM
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Does anyone use preferred shares are part of their portfolio? Are there preferred share index funds you use?
I looked at vanguard and they don' t seem to have one. iShares has some but the MERs are high.
Is there an advantage/disadvantage to preferred shares as substitute for part of the stock and/or bond portion of the portfolio? They're like this weird hybrid security.
I just never hear them get talked about, but they're out there!
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As you state, preferred shares act more like bonds. They have a set dividend rate based on an issue price (usually $25 or $50). Upon expiration or if they get called, you'll get the $25 or $50, so never pay more than that.
They are "preferred" because they get paid dividends and upon bankruptcy before common stock, but after bonds. Because they are equity, the dividneds may be taxed as qualified dividend income, and not ordinary income like bonds. That is not the case for all preferred shares.
Most preferred shares are in financials and utilities, with a few REITs thrown in. To my knowledge, no one has created an "index" of preferred shares. The are some ETFs out there. See http://etfdb.com/type/preferred-stock/all/. You can compare holdings, fees, etc.
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Do note that a lot of preferred shares have dividends that are not qualified dividends and as such have a higher tax rate (making their higher yield less attractive), unless you're buying in a tax deferred vehicle.
Also, if you buy above par value, they can be repurchased at par if they've expired, hitting you for a loss, so just be sure to know the maturity date.
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I have a small position in JPS. It is above my buy range now.
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Thanks, I've read up on them but I didn't see how they fit for me so I didn't use em.... sticking with index based bond/stock ETFs.
I was curious if other folks use em. They must exist for a reason... right? :)
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I use them as part of my equity portion of one of my portfolios, I use the PFXF etf.
I'm trying them out in place of reits that some people do.
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I own a piece of PFF, and count it as part of my fixed income allocation in my retirement accounts. While not a bond, their behavior is most closely associated with other fixed income instruments.
They're a good source of yield with a different set of risks from high yield bonds. I don't have the exact number in front of me, but it's maybe ~3% of my total portfolio.
I keep a pretty diversified income portfolio though. I have everything from emerging market bonds to 25yr+ zero coupon treasuries, and most everything in between.
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I do include preferred shares in my portfolio of individual stocks and bonds. But I make sure that the preferred shares I buy are (1) non-callable... (2) cumulative... (3) and priced no higher than their redemption price. All that after, of course, vetting the company itself for its financial health.