ETFs holding preferred shares can potentially be a unique source of consistent income.
Income-seeking investors have another option besides the typical dividend stocks, high-yield bonds, and real estate investment trusts: preferred stocks, which are hybrid securities that combine characteristics of ordinary stocks and bonds.
According to VanEck vice president and director of product management Brandon Rakszawski, preferred stock owners typically rank above owners of common stock and below owners of senior debt in a company's capital structure. The hybrid profile of preferred stocks gives them some distinctive characteristics.
In contrast to common shares, these assets typically lack voting rights, but they make up for it in other ways. Interestingly, preferred equities frequently produce steady income with substantially greater yields than conventional dividend stocks and even corporate bonds.
According to Chris Manske, founder and president of Manske Wealth Management, "in some instances, if the corporation cannot pay the preferred dividends, that liability accumulates, and the preferred shareholders will receive distributions before common shareholders."
Preferred stocks have the same potential for share price growth as common equities, albeit to a lesser extent. As a result, Rohan Reddy, director of research at Global X ETFs, claims that preferred shares may be the best option for investors seeking safety and return while still desiring stock ownership.
These securities do, however, come with a special set of dangers to be aware of.
Preferred stocks, being hybrid instruments, are vulnerable to hazards associated with fixed income, such as interest rate risk, according to Rakszawski. Preferred stock values might decrease along with bond prices when interest rates rise. Also, due to their lower capital structure placement, preferred stock holders "may be vulnerable to a higher credit risk than senior loan holders," the author adds.
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