Hylland Capital
The next generation in financial planning

Ask an Advisor Archive

Your Personal Finance Questions - Answered!

"What are some alternative investments to stocks?" Round 2: Preferred Shares

All This week, we’re looking alternative investments to stocks to help diversify your investment portfolio, and hopefully will help reduce your drawdowns in times when the market behaves like it has these last couple of weeks.


Today we are moving on to looking at Preferred shares.

Preferred shares are typically described as hybrids between stocks and bonds. They typically offer consistent dividends that are higher than you would receive with a company’s stocks or bonds, but they typically don’t see the same magnitude of price appreciation as stocks do, and their dividends are not legally required to be paid like the interest on a company’s bonds.

So, what has their performance been like? Over the last month, preferred shares have been flat while the US stock market has declined 10 percent.

Longer term - Over the last decade, preferred shares have averaged an annual return of 10.1%, slightly under stocks, but higher than high yield bonds and an aggregate bond fund.

Preferred shares have put up those returns with a correlation to US stocks of 0.52. That is lower than high yield bonds and REITs, meaning that preferred shares tend to move more independently than other investments and have historically been better at providing returns when stocks go down.

But, why many investors like them is for their dividend. The most popular preferred share ETF today, ticker symbol PFF has a dividend yield near 6% today. And, preferred share dividends count as qualified dividends, so they are taxed at a reduced rate compared to bond interest.

Preferred shares are unlikely to make you rich, but during years where the stock market trades sideways or slightly negative, preferred shares can provide a much needed boost to your portfolio’s returns.

Matt Hylland