Historical Performance of Preferred Stocks
Preferred stocks are a unique investment option that offers a combination of characteristics from both common stocks and bonds. They are often considered as hybrid securities, offering investors the opportunity to earn fixed income like bonds while also having the potential for capital appreciation.
In this article, we will delve into the historical performance of preferred stocks to provide insights into their returns and risks over time.
Firstly, it’s important to understand that preferred stocks differ from common stocks in terms of priority in receiving dividends and claims on assets in case of bankruptcy. Preferred stockholders have a higher claim than common stockholders but rank lower than bondholders.
When analyzing historical performance, it’s essential to consider total returns, which include price appreciation as well as dividend payments received by investors. Over the long term, preferred stocks have shown relatively stable returns compared to common stocks and higher yields compared to bonds.
Between 1975 and 2020, preferred stocks returned an average annualized total return of around 9%, according to data compiled by Ibbotson Associates. This outperformed long-term corporate bonds but lagged behind common stock returns during the same period. It’s worth noting that past performance is not indicative of future results.
One reason for investing in preferred stocks is their attractive dividend yields. Preferred stock dividends are typically fixed or adjustable-rate payments made before any distribution is made to common shareholders. The yield on preferreds tends to be higher than what can be earned from corporate bonds due to their subordinated position in the capital structure.
During periods when interest rates were low or declining, such as between 2008 and 2016, many investors found solace in high-yielding preferred shares. However, when interest rates rise significantly or rapidly (as seen during certain periods), these investments may become less appealing compared to other fixed-income options available at that time.
It’s crucial for investors considering preferred shares to carefully evaluate individual issuers and their creditworthiness. As with any investment, diversification helps mitigate risks associated with individual company performance or sector-specific challenges.
Preferred stocks are also sensitive to changes in market conditions, including interest rate fluctuations. When interest rates rise, the fixed dividend payments on preferred stocks become less attractive relative to other investments that offer higher yields. Conversely, when interest rates fall or remain low for an extended period, preferred stock prices tend to rise as demand increases for high-yielding assets.
In conclusion, historical performance suggests that preferred stocks have generally provided investors with stable returns and attractive dividend yields over the long term. However, it’s important to carefully assess individual companies’ creditworthiness and diversify investments across different sectors to manage risk effectively.
Before investing in preferred stocks or any other securities, consulting with a financial advisor can help individuals understand their risk tolerance and develop a suitable investment strategy aligned with their financial goals.