Preferred Stocks: Big Dividends, Complex
Q What are the advantages and disadvantages of owning preferred stocks?
- N.W., Friday Harbor, Wash.
A Preferred stocks are purchased by conservative investors seeking high dividends plus share-price appreciation.
Companies can issue two types of stock: common and preferred. Owners of preferred stock receive, as the name suggests, preferential treatment over holders of common stock. Example: They get dividends before holders of common stock.
Think of a preferred stock as a bond without a maturity date. Preferreds pay a fixed, usually high, dividend. The shares can also rise or fall in value, but not as much as common shares. And the dividend payments cannot rise, as they can for common stock.
Your principal is subject to greater risk than with a bond, since the value of your shares may fluctuate sharply. A company could also suspend your dividend payment. If the stock is a "cumulative" preferred, the company must eventually make up the dividend payment, but not if it is a "noncumulative" preferred. The company could also "call" preferred shares and redeem them for less than the market price.
Experts suggest you buy preferred stock only from a broker savvy about them.
Q We are a couple in our 70s who have savings in HH (US Savings) bonds and individual retirement accounts totaling over $200,000. We also have real estate of around the same amount. Selling these investments incurs a 15 percent tax. Are there better options?
- K.K., Ackley, Iowa
A It's hard to get too detailed without knowing some specifics about your IRA holdings and the real estate. But the HH bonds make the question interesting, says Daniel Pederson, author of "US Savings Bonds," ($27.95; 800-927-1901). You could earn more by shifting to higher-yielding investments, or possibly municipal bonds, since their income is sheltered from federal (and often state) taxes. Dig out a calculator to see if higher yields offset the capital-gains taxes. You might want to consult a financial planner or accountant.
HH bonds pay 4 or 6 percent interest. If you earn 4 percent, you could earn more in bank certificates of deposit or money-market accounts. New EE bonds pay 5.59 percent. But you will owe taxes on accrued interest if you sell.
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