Preferred Bank Stocks: The Investment Retirees (and Others) May Be Missing Out On

Retirees worried about running out of money are often on the lookout for investments that can help them stretch their dollars.

They have plenty of options to choose from, including stocks, bonds, annuities and CDs. But one investment option retirees and pre-retirees may overlook — or be unaware of — is preferred bank stocks that pay dividends.

These can give a nice boost to your retirement income and are one more way to diversify your portfolio as you work to get the most out of your retirement savings.

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

What are preferred bank stocks?

Preferred bank stocks are something of a hybrid investment that share characteristics with both bonds and common stock. Preferred stock shareholders receive dividends that are a fixed amount, and (this is the "preferred" part) those dividends are paid before any dividends are paid for common stock.

One more reason preferred stocks have their name: If a liquidation occurs, preferred shareholders have a higher claim on the bank's assets than those who own shares of common stock, although preferred shareholders' claim is below that of creditors.

Most large banks — and some smaller banks — issue preferred stocks, including Goldman Sachs, Chase, Citibank and Bank of America.

Why should you invest in them?

Preferred bank stocks have some advantages over common stocks and bonds. For example:

Their yield often outpaces bonds. The dividends on preferred stocks typically provide higher yields than bonds. Also, unlike bonds, many preferred stocks don't come with a maturity date, so, theoretically, you can continue to collect the dividends into perpetuity.

With bonds, once the maturity date arrives, the bond issuer pays the bondholder the principal and interest, and the issuer's obligation has ended.

They come with a tax advantage. As is the case with dividends for some common stocks, the dividends that preferred stocks pay are often considered to be qualified capital gains.

This means they are taxed at a lower rate than ordinary income. For most people, the tax rate for those dividends will be either 0% or 15%, although taxpayers with extremely high incomes could pay 20%. Compare that to tax rates for ordinary income, which can go as high as 37%.

They can be purchased well below their par value. Preferred bank stocks usually have a par value of $25 a share, and shareholders usually buy them well under the par value.

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Although many of these stocks can pay dividends into perpetuity, some have a call date when the issuer can repurchase them. If they are called, the shareholder may make significant gains.

Of course, most buyers aren't investing in them for those gains; they are really in it for the dividend and the regular income it provides.

The risks with preferred bank stocks

As is the case with nearly any investment, preferred bank stocks do come with risks. One downside is interest rates. When those rise, the value of preferred stocks tends to drop, although once again, the aim is to collect the dividend, not sell the stock at a gain.

Another risk is that investors could lose their money if the bank fails. But this is one reason that my firm focuses on the preferred stocks issued by large banks, which are generally financially stronger and have a good track record.

Overall, preferred bank stocks represent a solid alternative investment for retirees or anyone on a fixed income. A financial professional can discuss the pros and cons and help you determine whether adding this option to your portfolio is the best move for you.

Ronnie Blair contributed to this article.

Securities and advisory services offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC, and a registered investment adviser. MAS and William Skillender Wealth Management Tax Advisory are not affiliated entities. Our firm is not licensed to offer tax preparation. We offer tax strategies related to investing and retirement income. Consult your tax adviser regarding your tax situation.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this article shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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