Preferred Shares: The 7% Retirement Solution
This Retirement Plan Pays 7%
“Rob, low yields crushed my retirement.” my neighbor Alan explained.
“For most of my life, you could always earn a decent interest rate. If we could find five percent on a bank CD, the wife and I would both retire.”
Alan isn’t alone.
Millions of Americans have worked hard and stashed some money away. The plan? Stick the nest egg in something safe and buy one of those sailboats from the retirement commercials.
Call it the “great yield theft.” Governments slashed interest rates to the bone in order to bail out their banker buddies. Now a seven-figure bank account yields only enough to buy a coffee each month, and not even one of those fancy frappuccino drinks.
It puts retirees in a tough spot. You can keep your money in bank certificates of deposit, earning next to nothing. You can buy junk bonds for higher yields, with all the sleepless nights that brings. Or you can let it ride in the stock market, hoping the bottom doesn’t fall out of the economy.
Fortunately, there’s a better answer.
The past few years, I’ve become an evangelist of sorts for preferred shares. These issues combine the safety of bonds with the returns of stocks. And while many retail investors have never heard of them, preferred shares have a big following among Wall Street money managers.
I call them my “retirement solution.” Preferreds exist right in the sweet spot for older investors. And if you need steady income, they’re worth looking into further.
First, you have security.
Preferreds represent a class of ownership in a business ahead of common stock. These distributions must get paid before the normal dividend. In the event of a bankruptcy, preferred owners get their money before common shareholders see a nickel.
Furthermore, preferred dividends usually come with a cumulative clause. That means firms must pay back any missed preferred dividends before they can resume distributions to ordinary shareholders. But when you deal with the most creditworthy businesses, this usually isn’t a problem.
It’s kind of like having elite status at a hotel chain. Normal customers get a room and not much else. Platinum cardholders, however, become members in a special club, enjoying lounge access, customary upgrades, and lots of other perks.
Second, you get yield.
Common shareholders stand last in line to get paid. Worst, most businesses plow almost all of their earnings back into operations. For this reason, most stocks sport meager yields.
Preferreds, in contrast, come with big, upfront payouts. And like a bond, these distributions usually remain fixed. As a result, many of these issues yield five, six, or even seven percent.
|Capital One Financial Corp. Series H (NYSE:COF.PH)||5.7%|
|Allstate Corp. Series E (NYSE:ALL.PE)||6.0%|
|Digital Realty Trust Inc. 7.375% Cum. Redeem. Pfd. Series H (NYSE:DLR.PH)
|Coresite Realty Corp. 7.25% Cum. Redeem. Pfd. Series A (NYSE:COR.PA)||7.0%|
|Citigroup Inc. Series AA (NYSE:C.PP)||7.5%|
Source: Google Finance
Of course, you can’t call preferreds a sure thing.
Higher interest rates can clip prices. Low-end firms default from time to time. Some preferreds can get called back by the issuer under certain conditions, which stings if you’ve locked in a higher yield.
That said, we can cut our risk by sticking to the best issuers. I also tell my readers to own a basket of these securities. That way, you shouldn’t get hit too hard if any one company goes under.
For those looking to get started, I would check out the Nuveen Quality Preferred Income Fund (NYSE:JPS). This closed-end fund owns a basket of Grade-A preferreds. A professional management team handles all of the investment decisions, so rather than sleuthing through hundreds of individual issues, JPS provides a “one-click” solution for retirees.
The best part? Right now, these shares pay a monthly dividend and yield over 7.3%. For those struggling with low interest rates, you can’t find a better payout anywhere else.
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