Will Preferreds Be A Safer Port?

By March 30, 2007Dividend ETFs

Some investors are looking for yield. Yet common stocks in the S&P 500 only serve up 1.7% per year, hardly bowling over the conservative folks. Even those who seek higher dividend stocks from the utilities and financial services sectors have found themselves dealing with voaltile gyrations of the stock market.

Unlike common stock which rarely get over the 3% hurdle, preferred shares tend to pay between 5% and 8%. A preferred stock ETF that tracked traditional preferred shares rated BB+ and better would yield twice that of the ever-popular iShares Dow Jones Dividend Index (DVY).

So what are the choices? One alternative is the iShares S&P U.S. Preferred Stock Index (PFF) that began trading just this past week. This new ETF exposes investors to a diversified basket of preferred stocks, offering a collective yield that may approximate 5.5% over time. (In 2006, the S&P Preferred Stock Index garnered a loftier 8.5% gain.) One receives a set, guaranteed dividend payment with less ups and downs of common stock.

Similarly, the PowerShares Financial Preferred Portfolio Fund (PGF) is based on the Wachovia Hybrid & Preferred Securities Financial Index. It has an annualized return of approximately 5.25%, though the index turned in a slightly more attractive 6.32% in 2006.

It’s hard to get excited about these investments, particularly because the yield is coming with very little price appreciation. Preferred stocks are less volatile than common stocks and more volatile than bonds, yet the exchange-traded fund possibilities might need to see some appreciation in the funds themselves to make them more inviting.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

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