The Average Millionaire Has At Least (3) Sources Of Income. How Many Do You Have?
Passive Income via Preferred Stock
What is Passive Income
Passive income, simply put, is money making money without any effort on your part. This can come in the form of rent from real estate, interest from savings accounts, dividends from stocks and mutual funds, and interest from bonds. If you ever want to become financially independent, then you better find a way to produce passive income. Without it, you will forever have to work for your money, and unless you are super-human you will not be able to work forever. This blog will show you how to start creating passive income. It will “show you”…it will not do it for you. You have to execute what you learn.
My goal is to show you how to build your own personal “mini-financial empire” that will produce a lifetime of passive income. Lets face it, we live in a monthly billing society so my techniques and strategies are geared towards generating income…plain and simple. I will also show you a way to out-live your retirement income because one of the biggest fears for those who retire young is out-living their retirement income. So let’s get started.
What exactly is a preferred stock? Basically, a preferred stock is a stock that acts like a bond. It is more stable than common stock and pays a pretty good rate of return. These types of stocks do not show the same type of price fluctuations as a common stock. You can also receive monthly dividend payments from this investment. That is why they can be called “Monthly Income Preferred Securities”. These securities can pay yields in the 7% to 10% range depending on the rating.
My blog page is not intended to be an all-encompassing resource on all types of income-producing investments. It is merely a guide to get you started and to let you see how wealthy people invest and manage their money.
Trying to get a good rate of interest on your investments can be pretty depressing in this current environment. In my opinion, when it comes to generating spendable cash from your investments, preferred stocks are among the most underutilized investments out there. I am going to give you some pointers when it comes to selecting preferred stocks for your mini-financial, cash-generating empire.
Here are (4) factors you should consider
Preferred Stock (title and type)
Interest rate / yield
Credit rating (of the preferred…not yours)
Preferred Stock Title and Type
Preferred stocks can have many titles like Trust, Floating, Subordinate, Convertible, and more. I like simplicity, so we will keep it simple. You may want to begin with Preferred stocks that do not come with all those extra labels.
Preferreds can either be classified as perpetual or callable. Perpetual shares do not have a stated date for maturity. On the other hand, callable shares may be redeemed by the issuing company at any date in the future.
There is an inherent risk with preferreds that are callable so therefore they will generally pay you a slightly higher yield than perpetual shares. The risk is that they will eventually be called and you will lose the yield and income. This means you will have to find another preferred holding to make up for the lost yield and income.
Interest Rate / Yield
The interest rate, or the yield of the dividend, is the amount of annual income shareholders can expect to earn on their Preferred investments. Savvy investors can secure some pretty good yields from Preferred stocks. Some Preferreds can have double-digit returns, but hold on to your hats; with high returns comes a correlated risk. If you are going for the higher returns, you better assess the risk. You will have to look at the company’s credit rating, the fundamentals of the company, and more. Do not invest solely for high returns without properly educating yourself on the aforementioned factors. Be smart and do your homework.
As a side note, any investment that has a yield will be sensitive to movements in the interest rates. Be a smart and prudent investor. Educate yourself on how your Preferreds will be affected with a rise or dip in the interest rates.
There are two ways dividends from Preferreds are classified…Cumulative and Non-Cumulative. Let’s take a look at Cumulative dividends. These are dividends that (must) be paid by the company. If the company cannot pay the dividends when they are due, then they will be accrued until the company is able to pay. Non-Cumulative dividends, on the other hand, can be withheld based on the profitability of the company. In other words, if the company is not showing satisfactory profitability, they have the right to withhold the dividend.
If you want to properly diversify your Preferred portfolio, I would suggest having a combination of Cumulative and Non-Cumulative. This goes against conventional wisdom because most investors feel it’s more advantageous to just hold Cumulative. Remember, we are not conventional and we are looking to do it like wealthy investors, not like the run-of-the-mill investors.
Here are some examples of Preferred Stock Funds to get you started in the right direction. These are not recommendations. The performance percentage is as of the writing of this blog. Please do your research.
Forward Select Income Fund (KIFAX)
Performance (1-yr) 6.31%
Cohen & Steers Preferred Securities & Income Fund (CPXAX)
Performance (1-yr) 6.15%
Destra Preferred & Income Securities Fund (DPIAX)
Performance (1-yr) 6.28%
First Trust Preferred Securities & Income Fund (FPEAX)
Performance (1-yr) 6.17%
Nuveen Preferred Securities Fund (NPSAX)
Performance (1-yr) 4.78%
Principal Capital Securities Fund (PCSFX)
Performance (1-yr) 5.30%
Principal Preferred Securities Fund (PPSAX)
Performance (1-yr) 5.45%