Wealth Management (A Special Report): Alternative Investing --- Why Now May Be a Good Time for Investors to Buy Preferred Shares
Q: Are preferred shares a good investment in this market and are they closer to bonds or stocks?</br></br>A: Preferred shares are complex investments that have similarities to both equities and debt. Preferred shares trade like stocks and are a claim on the assets and earnings of a company, just like common shares. But they hold a higher claim on the assets than common stock. That makes preferreds a somewhat safer investment.</br></br>While preferred shares usually don't have voting rights, they pay a regular dividend that can be substantial, making them similar in some ways to bonds. Dividends paid by preferred shares usually must be paid out before common shareholders receive their dividends.</br></br>"Preferred shares are slightly more like bonds than stocks as their historical price volatility more closely matches that of bonds," says Andrew Zimmerman, chief investment strategist at DT Investment Partners LLC. Just like bonds, they can be called by the issuer in times of falling interest rates, he notes.</br></br>"Since preferred shares are sensitive to interest-rate movements, their prices fall when interest rates rise and vice versa," he says. "However, since they offer such relatively high yields, the income component of preferred shares can help to offset the price decline in periods of small interest-rate spikes."