Earn 4% to 7% With Preferred Stocks

Preferred stocks combine elements of stocks and bonds in one investment. Typically issued at $25 a share, they pay a fixed rate of interest like bonds do. But preferreds trade like stocks and can bounce above or below the issue price. Preferreds tend to pay more than comparable bonds because they’re riskier. An issuer may be able to delay or cut payouts, and if the preferred is “non-cumulative,” the issuer isn’t on the hook to pay missed dividends. Issuers do owe all payments if a preferred is “cumulative,” but yields for these securities tend to be lower.

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Earnings for All

Risks to your money. Similar to long-term bonds, preferred stocks tend to be sensitive to interest rate moves. Companies may be able to redeem, or “call,” their preferred shares at any time, potentially saddling investors with losses. Preferred stocks, which tumbled during the financial crisis, could dive if investors lose faith in banks and other issuers.

Hire a pro. The exchange-traded iShares U.S. Preferred Stock ETF (PFF, $39, 5.8%), a member of the Kiplinger ETF 20, offers access to hundreds of preferred securities issued by firms such as Allergan, HSBC and Wells Fargo. Banks and other financial firms account for 60% of its assets, though, concentrating most of the fund into one sector. Market Vectors Preferred Securities ex-Financials ETF (PFXF, $20, 6.0%) tracks an index of nonfinancial preferreds.

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Do it yourself. With individual securities, stick to financially solid companies and buy shares below or only slightly above their $25 issuance price, says Michael Greco, cofounder of GCI Financial, an investment firm in Mendham, N.J. One preferred he likes: JPMorgan Chase 6.15% Non-Cumulative Preferred Series BB (JPM-PH, $26, 5.9%). Shares can’t be redeemed by JPMorgan until 2020, and dividends are considered to be “qualified,” meaning the maximum federal tax rate on the payments is 15% or 20%. Greco also favors Chesapeake Lodging Trust 7.75% Preferred (CHSP-PA, $26, 7.4%). A real estate investment trust, Chesapeake owns hotel properties such as the Hyatt Regency Boston and should easily cover its dividend payments, says Greco, though they don’t qualify for preferential tax treatment.

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Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.