"Although traded the same way as regular stocks, preferred stocks are more like bonds," explains Harry Domash, who focuses on long-term investing for those seeking both growth and income.
In his Winning Investing, the advisor looks at a pair of preferred stock favorites, which offer above-average dividend yields of 7.4% to 8.2%.
"Usually issued at $25 per share, preferreds generally trade in a narrow $24 to $26 range, no matter how well the issuing company fares. Investors buy them for the steady dividends, which typically equate to 4% to 8% yields.
"When issued, preferreds pay a yield determined by the annual dividend. The yield for a stock paying $1.00 annually would be 4% ($1 divided by $25).
"However, the market yield depends on the current share price. For instance, if the share price drops to $24, the market yield rises to 4.2% for new buyers.
"There are risks. Preferred shareholders face two major risks: 1) the issuing firm runs into financial difficulties and stops paying the dividends, or 2) interest rates rise making the initial yield non-competitive. If that happens, the preferred’s trading price drops until its market yield reaches a competitive rate.
"Most preferreds are issued by banks and real estate investment trusts. Currently, due to the negative publicity surrounding financials, preferreds are trading below their usual range. We are recommending two stocks, both, in our view, financially solid.
"Our first recommended preferred, Banco Santander Series I (STD-I), recently traded at $21.60. It's annual dividend (paid quarterly) is $1.6025, suggesting a market yield: of 7.4%
"Headquartered in Spain, Banco Santander (NYSE: STD) offers banking services in Spain, Portugal, Germany, Italy and in the U.K.
"Our second recommended preferred Vornado Realty Series F (VNO-F), recently traded at $20.60. Its annual dividend (paid quarterly) is $1.6875 for a market yield of 8.2%.
"Vornado (NYSE: VNO), a REIT, owns major shopping centers and office complexes in the New York City, Boston, and the Washington, D.C. areas.
"Both preferred are trading in the $20.50 to $21.00 range. That brings the yields to new buyers up to 7.4% to 8.2%, vs. 6.4% to 6.5% when originally issued. Also, assuming that they remain financially solid, the share prices may eventually move back up to $25.
"If that happens you would enjoy 20% or so price appreciation, plus the dividend yields. Some preferred dividends are taxed at the maximum 15% rate, and others are taxed as ordinary income, which suggests that they are best used in tax-sheltered accounts."
