Check out preferred stock when looking for yield -- Page 2

Experts are divided on the benefits of individuals owning preferred stock.

"As a bond alternative it's not real good and as a stock it's not all that great either. If we want the excitement that stocks bring, we buy common stock. If we want stability we buy bonds," says Moisand.

But Gregg Mekler, senior vice president of investments at Piper Jaffrey in Minneapolis, says preferreds are a terrific investment for those who want better-than-average yield.

"We often use preferreds for clients looking for income. We use them with the caveat that they respond to the bond market; as rates go up the value will go down. We make sure the client knows the current yield and, more importantly, the yield-to-call. If this gets called in two years, what are you actually receiving? What's the real number?"

Suplee recommends diversifying preferreds just as you would diversify common stock holdings. His preferred stock portfolio would hold at least 10 different issues. At $25 per share, and assuming a purchase of 100 shares of each of the 10 stocks, an individual would be looking at an investment of about $25,000. Since Suplee advises that preferreds make up no more than 10 percent of a portfolio, an investor who abides by this formula should have an overall portfolio value of approximately $250,000 or more.

"You don't want 10 different telecom preferreds. Buy one consumer durables, one auto manufacturer, one telecom and spread out the risk. You don't want consolidation in industries," Suplee says.

4 types of preferred stock
There are different types of preferreds: cumulative, noncumulative, participating and convertible. If a company experiences financial problems and stops paying the dividend for a while, investors who hold cumulative shares will be paid the dividends that accumulated during that period; investors who hold noncumulative shares will not receive those dividends.

Holders of participating preferred stock may receive additional money, a bonus so to speak, if there is money left over after the company pays out dividends to preferred and common shareholders.

Convertible shares can be converted to common stock.

But perhaps the credit rating is the most important aspect to be concerned about when buying preferred stock. Just as with bonds, preferreds are rated by companies such as Standard & Poor's and Moody's. Suplee says it's more important to get a highly rated preferred than to worry about whether it's cumulative.

"Get A rated or better. An A rated will pay the dividend," he says.

One other thing to keep in mind is that preferred share holders have limited voting rights. Many company issues that common shareholders vote on are off-limits to holders of preferreds.