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Investors looking for solid gains have been wringing their
hands since the subprime crisis hit last summer. We
haven't seen this much volatility in the equity markets for
almost 75 years. The S&P 500 is down -10% over the
past year. And the prospects for a speedy economic recovery
appear slim.
Paradoxically, income investors have something to
celebrate lately. The virtual meltdown in the credit
markets has resulted in a surprising silver lining; yields
on safe, investment-grade preferred stocks have been on the
rise. Preferred stocks have always offered better
yield opportunities than other asset classes -- but the gap
has gotten even wider, thanks to the credit crunch.
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As you can see in my chart shows the average yield for stocks in the
S&P 500 is currently a miserly 2.17%. A
six-month CD is only going to net you 2.78%.
And the average bond yield, as measured by the
Lehman Aggregate Bond Index, is still only 4.81%.
Preferred stocks, on the other hand, are averaging a
6.82% yield, per the the S&P U.S. Preferred Stock
Index.
Granted, the average |
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preferred
yield includes some below-investment-grade fare. And
those higher-risk, higher-yielding preferred stocks do bring
up the average. But I have some good news for you...
Dozens of high-quality preferred stocks are paying
higher-than-average yields, right now.
Too Much of a Good Thing
Hurt by the credit mess, cash-strapped banks are shoring up
their balance sheets by issuing billions of dollars in new preferreds. These include names like Citigroup (NYSE:
C), Merrill Lynch (NYSE: MER), Bank of America (NYSE: BAC),
and Washington Mutual (NYSE: WM). Government agencies like
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and
homebuilders like Toll Brothers (NYSE: TOL) are also doing
the same.
The increased supply of new
preferred stock flooding the market is sending share prices
lower. And since share prices and yields move in opposite
directions, the supply surge is also lifting yields to
historically high levels.
At
the same time, the U.S. Federal Reserve has been ratcheting
down interest rates, and driving down the yields on
everything from Treasuries to money market accounts.
These divergent trends have created an unprecedented
opportunity for income investors.
Preferred Income is Safer
Not only do preferreds pay higher yields than stocks,
but their payouts are more secure than common dividends.
Preferred shareholders have a claim to a company's assets
ahead of common shareholders -- that's why they're called
"preferred." In other words, if a company runs into
trouble, it must pay preferred dividends before common-stock
dividends.
While a preferred stock can still default on its payments,
ratings company Standard and Poor's classifies this as an
"extremely rare" occurrence. Principal Global
Investors estimated the historical default rate for investment-grade
preferred stocks was less than 0.2%.
Unlike common dividends, preferred payouts are
predictable -- they don't go up and down with a company's
earnings. A number of banks like Washington Mutual
(NYSE: WM), National City (NYSE: NCC), and Citigroup (NYSE:
C) have cut their common share dividends in reaction to the
credit crisis - while continuing to pay their preferred dividends
at their issued yield, like clockwork. In fact Citigroup is one of the banks that has issued new preferreds
this year.
And after the last few
months of whiplash-producing market swings, investors will enjoy
the low volatility of these holdings. Preferred stocks are
also a great way to diversify your portfolio to ensure regular,
timely dividend payments. This is particularly important for
retired investors, many of whom depend on their portfolios to
pay their monthly bills.
This Opportunity May Not Last
Today's unprecedented gap between preferred yields and
the yields offered by other investment-grade securities is currently being driven
by a temporary supply increase. As more and more
investors gobble up the latest preferred offerings, this gap
will start to narrow.
In a recent issue of my premium newsletter,
High-Yield
International, I profiled one of my favorite
preferreds. It offers an above-average 7.56% yield, and
it's backed by an ultra-safe credit rating of "A" from
Standard and Poor's. This Netherlands-based company
has doubled its profit over the past four years and you can
rest easy knowing that your sizable future dividend
payments should be secure.
If you'd like to learn the name of this stock -- plus
receive a steady stream of foreign stocks, preferreds, and
other investing ideas with abnormally high dividend yields
each and every month -- then I'd like to extend you a
personal invitation to try my premium investing newsletter .
. . High-Yield International.
Visit this link to learn
more.
Significant changes are occurring in the investment
world, and my High-Yield International service can
introduce you to many other historic opportunities --
opportunities like we're finding in preferred stocks today.
I invite you to join me as I scour the world for the
best-yielding ideas it has to offer.
Thanks for joining me on my search for today's
highest-yielding securities!
--
Nick Lanyi
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address, Editors@GlobalDividends.com,
to your Address Book or Safe List. For instructions, go
here.
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