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Preferred Stocks Deliver High Yields

Investors seeking income may want to look at preferred stocks as a source of high dividend yields. Typically the yield on preferreds can be several percentage points higher than yields of comparable income securities. But before you buy a preferred, get educated about them because preferred stocks come in many flavors.

Preferred stocks are issued by the same companies that offer everyday common stock. The yield on a preferred stock is considerably higher than the yield on a common stock.

Preferred stocks offer a dividend that never increases and the price of the preferred stock usually stays in a narrow range unlike common stock that can shoot up or fall precipitously. So owners of a preferred stock will miss out on large upside moves associated with the common stocks of the same company.

The benefits of preferred stock include:

The drawbacks of preferred stock include:

Preferred stocks have some features like a stock and others like a bond. Here is list of important features to look for in a preferred stock:

Also check with your tax consultant about the tax treatment of income received from preferred stocks. Some income is taxed at 15 percent while other income is taxed at higher rates.

How to Buy Preferred Stocks

You have three choices to own preferred stocks:

Individual Preferred Stocks

You can buy shares of individual preferred stocks through a broker just like you buy common stock. You'll pay a commission when you buy and sell the stock. If you buy individual preferreds, you should buy preferreds for more than one company to spread your risk among several stocks. Like any asset it is prudent to diversify your holdings.

QuatumOnline give price quotes and much more information about preferred stocks. The site is free but you must register to obtain quotes.

Closed-End Funds

You can buy closed-end funds that specialize in preferred stocks. The funds holds many preferred stocks so you have some safety through diversification. Closed-end funds are traded on major stock exchanges and you purchase a closed-end fund through a broker and pay a commission.

A closed-end fund deducts its management fees before it distributes the dividends, so your dividends will be reduced by the size of the fees. As with any mutual fund, buy closed-end funds that charge the lowest fees. Closed-end funds trade at either a discount or a premium to their underlying net asset value. Only buy a closed-end fund when it is at a discount.

Open-end Funds

The last option is to own regular (open-ended) mutual funds that concentrate on preferred stocks. Many of these funds have high fees and should be avoided.

Exchange-traded Funds (ETFs)

You can buy ETFs that specialize in preferred stocks.