Preferred stocks are the little-known answer to the common dividend question, “How does one juice meaningfully 6-7% yields by investing in blue-chip stocks?”
Most common blue-chip stocks don’t even pay a 5% yield. Even the S&P 500’s current yield, at just 1.3%, is its lowest in decades.
Nonetheless, some blue-chip stocks of 505 companies in the popular index, such as JPMorgan Chase (JPM), NextEra Energy (NEE), and Broadcom (AVGO), are currently trading at 4.2% to 6.9% yields.
What is a Blue-Chip Stock?
Blue-chip stocks are the stocks of renowned and high-quality companies that lead their respective industries. Such companies have stood the test of time and gained the respect of their customers and shareholders.
Most blue-chip companies make regular and growing dividend payments. With solid business models, these companies have managed to produce long records of attractive returns, which has made them among the most popular individual stocks in the stock market, especially for conservative investors looking to put their money into work.
Below are the main characteristics of blue-chip companies:
- An industry leader with a proven business model
- A strong reputation and track record of delivering strong returns over the long term
- Pays dividends to shareholders and regularly increases the same.
No single stock should make up the bulk of your investment portfolio. Diversification is vital when investing, especially when investing in preferred Blue-chip stocks that belong to companies considered rock-solid.
How To Squeeze up to 6.9% Yields by Investing in Blue-Chip Stocks
When discussing a million-dollar retirement portfolio, this is the difference between US$13,000 in annual dividend income and US$42000. Or, better yet, a US$69,000 annual dividend income by investing in blue-chip stocks.
Most investors are not aware of the easy-to-find “dividend loophole” because they prefer common stocks. For instance, when you type AVGO into your brokerage account, the quote you get back from your machine is the common variety.
But many blue-chip companies have a different class of shares, known as the “preferred payout tier,” which deliver far more generous dividends. These companies issue preferred stock rather than issuing bonds to raise capital.
Some of the benefits of these preferred stocks include:
- They are the top priority over common shares
- Sometimes they’re “cumulative”- if any dividends are missed, they’ll have to be paid out before dividends can be paid to any other shareholders.
- They’re juicier than the modest dividends paid out on the common stock. For instance, a company’s whose common yield is 1% to 2% might still distribute 5% to 7% to preferred shareholders.
At times part-stock and part-bond holdings are preferred by investors known as “hybrid” securities. They are part-bonds because they trade around a par value over time, so they don’t tend to deliver much while preferred can deliver price upside.
However, the main point of preferred stocks is income and safety.
Anyone can invest in individual preferred stocks, but there’s little information available to make an informed investment decision. The best alternative is to purchase preferred funds.
But not all preferred funds -meet investors yield expectations. There are only a few preferred funds that offer a yield of 4.2% to 6.9%. Examples include:
- iShares Preferred and Income Securities, which offer a yield of 4.2% (PFF).
- Invesco Preferred ETF (PGX, 4.5%).
-They are also the largest on the market, as they collectively account for US$27 billion in funds under management.
Both assets look similar on the surface because they invest in a few hundred preferred stocks. In addition, both have a majority of their holdings in the financial sector (PFF 60%, PGX 67%), and they offer affordable fees given their capacity (PFF 0.46%, PGX 0.52%).
Preferred stock Close-End funds (CEF)
Preferred Stock CEFs have some perks that allow investors to earn higher yields. While most preferred ETFs are indexed, CEFs are actively managed.
Additionally, CEFs allow for debt to amplify their investments, both in yield and performance. They also have better monthly returns.
For instance, John Hancock Preferred Income Funds II (HPF) offers a 6.9% yield. HPF has 70% preferred assets and has invested 22% in corporate bonds and another 4% in common stock.
Other CEFs include Flaherty & Crumrine Preferred and Income Securities Funds (FFC), which offer a 6.7% return.
If you are looking for higher yield than Preferred Stock ETFs and CEFs could be considered as part of your portfolio construction.
Emma Smith received their MFA in Creative Writing from Mills College. Born in Oakland, California. Emma is notorious among their friends for always being surprised by twist endings to books/movies and organizing their bookshelves by color. When not writing, Emma enjoys exploring the outdoors with their dog.