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  • Bond investors are often looking for the highest yields they can find.

  • While we usually caution that higher relative yields do come with greater risks, an allocation

  • to riskier fixed income investments to earn higher yields can make sense as long as it’s

  • part of a well-diversified portfolio.

  • Preferred securities are one way to earn those higher yields.

  • I’m Collin Martin, and this is Bond Market Today.

  • Preferred securities are type of hybrid investment that share characteristics of both stocks

  • and bonds.

  • Like bonds, they have fixed par values, they make scheduled coupon payments, and they generally

  • have ratings from rating agencies like Moody’s or Standard and Poor’s.

  • But preferred securities have very long maturity dates--usually thirty years or more--or no

  • maturity dates at all.

  • Preferred securities are often "callable", meaning an issuer can retire them after a

  • certain amount of time has passed at their par value.

  • Like stocks, preferred securities rank relatively low in an issuer’s priority of payment plan,

  • usually below an issuer’s bonds; and the coupon payments the preferreds make are often

  • discretionary--meaning that they can usually suspend the coupon payments without necessarily

  • triggering a default.

  • Now, even though preferred securities rank below an issuer’s bonds, they rank above

  • an issuer’s stock.

  • So, before a firm can make a common stock dividend payment, it needs to pay its preferred

  • shareholders first, hence the name preferreds.

  • Now, because of those hybrid qualities, preferred securities come with two key risks: interest

  • rate risk and credit risk.

  • Interest rate risk is the risk that an investment’s value will fall if interest rates rise, and

  • because preferred securities have very long maturity dates or no maturity dates at all,

  • theyre highly sensitive to long-term treasury yields.

  • Credit Risk is the risk that an issuer can’t make timely interest or principal payments.

  • So, because preferred securities rank below an issuer’s bonds, and because their coupon

  • payments may be discretionary, they have relatively high credit risk also.

  • Now, because of those risks, preferred securities do offer higher relative yields.

  • Now, rather than be tempted by those higher yields, we always think it’s best to invest

  • in preferreds in moderation, and as long as you have a long-term investing horizon, because

  • preferred securities prices can be highly volatile.

  • Preferred securities should never be considered short-term investments.

  • And finally, preferred securities are very unique and they come with a lot of nuances,

  • so it can be difficult to find an appropriate investment.

  • A Schwab fixed income specialist can help you navigate the market.

  • To watch future episodes of Bond Market Today, you can subscribe to the Charles Schwab YouTube

  • channel.

Bond investors are often looking for the highest yields they can find.

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Preferred Securities Explained

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    洪子雯 posted on 2020/03/20
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