They'll pay you the current market price and you'll have lost an income stream. However, after five years, a company can call the outstanding shares of its preferred stock, which they will often do if it is financially advantageous for them to do so. Like bonds, preferred stock generally has a maturity date set decades in the future. Another drawback to preferred stock that investors may want to consider is the very real possibility that a company will issue a share call. Thus, if you're seeking growth, you'd best look elsewhere. Why Preferred Stock May Not Be Right For YouĪs I mentioned above, preferred stock almost never offers investors significant capital appreciation. Lastly, preferred stockholders often benefit from qualified dividends that are classified as capital gains rather than ordinary income. Similarly, when a company suspends or cuts its dividend to common shareholders, preferred stockholders will continue receiving their checks. Common stockholders will get whatever is left, if anything. If, for instance, a company must liquidate its assets to pay its creditors, bondholders will be paid first, followed by preferred stockholders. Furthermore, preferred stockholders enjoy preferential treatment in the event of a company's financial distress. Instead, it offers investors a substantial yield, often well in excess of 5%. Thus, preferred stock rarely offers investors much in the way of capital appreciation. While preferred stock can appreciate or depreciate, shares have a par value that tends to prevent them from trading outside of a comparatively narrow price range. Like bonds, preferred stocks tend to appeal to income-oriented investors seeking a steady, predictable stream of cash. Preferred stock is a rather unusual type of equity that might best be described as a hybrid investment vehicle combining characteristics associated both with bonds and common stock. Why Invest in Preferred Stock?īefore proceeding to a closer look at PFXF, it is a good idea to review the unique qualities of preferred stocks for readers who may be unfamiliar with this particular type of investment. Today, I will be re-evaluating PFXF as an investment option for fixed income investors wary of the financials sector. In the second article, I took a closer look at the fund on its own and saw what, at the time, struck me as an intriguing opportunity for investors looking to add a preferred stock ETF to their portfolios. In the first of those articles, I considered PFXF alongside two of its competitors. I have covered PFXF for Seeking Alpha in the past, and came away with mixed feelings in both of the articles in which I discussed the ETF. In response to their understandable trepidation, I reasoned that it might be a good time to revisit the VanEck Vectors Preferred Securities ex Financials ETF ( NYSEARCA: PFXF ) since it would enable ETF investors to buy into the preferred stock space without having to worry as much about the impact of a potential banking crisis affecting the share price. In the comments section following the article, a few readers expressed some concern about the ETF's heavy exposure to the financial sector, given the uncertainty swirling around that sector in the wake of recent regional bank failures. Back in March, I published an article on Seeking Alpha in which I revisited the Invesco Preferred Portfolio ETF ( PGX), one of my favorite preferred stock funds.
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