The Market Cap by Investors Alley

September 15, 2017

A Safe Dividend Stock to Buy for a Consistent 5% Yield
Preferred stock shares can be viewed as a hybrid of common stock shares and corporate bonds. Preferred shares pay a fixed dividend rate, similar to bond interest. Technically preferred shares are equity like common shares.

The preference feature is that preferred dividends must be paid before any dividends can be paid on a company's common stock shares. While fixed in rate, preferred share dividends are more secure than common stock dividends. Investors are drawn to preferred stocks because of the higher level of safety combined with yields that are typically higher than from corporate bonds.

For a corporation, preferred stock sits between bonds and common stock in the capital structure. Unlike with bondholders, failing to pay a dividend to preferred shareholders does not mean a company is in default. In the event of bankruptcy, bond holders would have the highest claim on corporate assets, followed by preferred shareholders and then common stock investors get whatever is left.

Preferred shares are usually issued with a fixed dividend rate. They usually don't have a maturity date, but most preferred shares are callable after a certain number of years. The fixed dividends and priority over common shares for dividend payments make preferred stocks more like investments in very long-term bonds. The details of an individual preferred stock can be intricate, with features such as cumulative dividends, convertibility, and the call provisions.

The largest issuers of preferred stock are companies in the finance sector such as banks and insurance companies. Analyzing individual preferred stocks is a complex task. My recommendation to invest in this asset class is through an exchange traded fund (ETF).

Let's look at one right now currently yielding 5.1%.

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Meet the Author - Tim Plaehn
Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor of The Dividend Hunter and Automatic Income Machine newsletters. Tim Plaehn
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