Using your investments to generate income in a low interest rate environment can be very frustrating. With savings accounts and certificates of deposit paying near zero, it is forcing retirees to incur greater risk to earn more income. To help supplement the salary retirees used to receive, we have found it successful to build a a sound foundation of blue-chip companies and individual bonds while complementing that foundation with preferred stocks.
Preferred stocks are similar to common stocks because they are traded daily and represent ownership in a company. They are also similar to individual bonds because they pay a fixed dividend that does not fluctuate. The label 'preferred' means that the company must pay the dividends due on its preferred shares before it pays any common stock dividends and preferred shareholders have a priority claim over common stockholders in the event of bankruptcy.
As with every investment, there are risks. Two predominant risks with preferred stocks are default risk and interest rate risk. Every investment has the potential for the issuing entity to go out of business and not be able to meet their obligations. Interest rate risk comes into play when interest rates rise. If interest rates rise sharply, it may negatively impact the value of your preferred shares. Because of these risks, and the current interest rate environment we are in, it may be best to use these investments as a supplement to a sound foundation.
To provide you with some examples (as of the close of business on 5/2/14), Goldman Sachs has issued a preferred stock that is paying-- 6.4% annual cash yield, Bank of America has a preferred stock paying an annual cash yield of 6.3%, and General Electric has a preferred stock paying a 5% annual cash yield. (Note: This is not a recommendation to buy any of the companies mentioned above.)
Depending on the issuer, the annual cash yield on a preferred stock may range from 4-8%. For more information on how preferred stocks may be able to complement your monthly income, please don't hesitate to ask me.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).