A High-Yielding Investment You’re Probably Overlooking

The breakout of the major indices has built a platform from which stocks can leap higher. Support now rests at the old breakout lines. For the S&P 500, that is the former resistance line at 1,340 to 1,344. And since that was such a formidable wall to break, it should also prove to be a strong line of bullish stability.

 

The bullish significance of this week’s breakouts cannot be overstated. All of the Russell indices — including the Russell 3000, which is comprised of 98% of all stocks traded in the United States — have broken their resistance lines.

And the Nasdaq, which was the prior leader in the major run-up from August to February, is almost at a 10-year high having already jumped 10 points above the October 2007 high at 2,862.

The major indices have confirmed that the long-term bull market is alive and well. It may not be a textbook move to new highs with strong volume and broad participation, but “the trend is your friend,” and the trend is up.

Next week, I’ll focus on targets for the bull market and sectors that are emerging as leaders. But today, I’d like to include a bonus for those investors who are not traders or even growth-stock buyers, but rather those who have been ravaged by low interest rates “while the world was awash in liquidity” (AAII Journal, August 2010).

Investors seeking higher yields with acceptably lower risk have had a couple of tough years. And yet preferred stocks, a class of high-yielding securities that have been around for over 100 years, receive very little attention from the investing public. Preferreds are senior to common stock, but subordinate to debt, and so they normally pay higher rates of return than bonds. And like common stock, their dividends aren’t guaranteed and they generally have no maturity date. But most can be redeemed by the issuer at a specified date and price. And many can be bought and sold on the NYSE.

Sam Stovall of S&P did a comparison study of the performance of the U.S. Preferred Stock Index, the S&P 500, and the Barclays U.S. Aggregate Bond Index over a long period and found that preferreds had a very low correlation with bond prices and a modest correlation with stocks. This means that even though preferred prices could fall if interest rates rise, their price is more directly correlated to the issuer’s common stock price.

In today’s environment of low interest rates and recovering stocks, this investment seems ideally suited for buyers who seek income, relative safety and diversification.

Sources: AAII Journal, December 2010; Standard & Poor’s Global Equity Strategy: U.S. Sector Watch, Nov. 8, 2010.

For an ETF that seeks to mirror the performance of the U.S. Preferred Stock Index, see the Trade of the Day.