As interest rates remain low, income investors are increasingly turning to preferred stocks and ETFs as a means of generating higher yields. On the surface, a yield of potentially 6% or more can look enticing, but you have to look under the hood to see exactly what you're buying to get that yield. The dozen or so preferred-focused ETFs that are out there tend to lack diversification and can carry some credit risk, so doing your homework is a must when investing here.
Preferreds carry several advantages over common stocks. They sit higher than common shares in the order of priority when it comes to both dividend payments and distribution of assets in the case of liquidation, so they're generally considered to be safer investments. Additionally, most preferred dividends are eligible for a lower tax rate.
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