Is it a Good Idea to Buy Preferred Bank Shares?
Many banks issue preferred shares that pay good dividends, but whether it's a good idea to buy them depends on your goal--current income or capital appreciation--and the timing of your buying and selling. You also need to understand how preferred shares compare to other types of securities.
Other People Are Reading
-
Preferreds Are Interest Rate Sensitive
-
Like other fixed-income securities, preferred shares move in the opposite direction of interest rates. When interest rates are stable, so are prices of fixed-income securities. When interest rates rise, fixed-income securities fall. Whether preferred bank shares are a good investment depends on where in the interest rate cycle you buy them.
Sector Rotation
-
Preferred bank shares represent ownership in the banks that issue them. Falling bank stocks may also drag down the prices of preferred shares. On the other hand, if bank stocks are depressed, buying preferred shares may be a good idea because of the high current income and potential for capital appreciation.
-
Capital Appreciation
-
Unlike common stocks, preferred stocks have a limited upside potential because they can be called, or redeemed, at par. An opportunity for capital appreciation arises only when preferred share prices are depressed--i.e., selling well below par--and are due for a rebound.
Safety
-
If you are primarily interested in high current income, keep in mind that bonds have a priority claim over preferred shares in liquidation. If the issuer goes under, you stand a better chance of collecting on your claim when you hold bonds.
How to Invest
-
Most financial publications list preferred share prices. A bank may have several types of preferreds outstanding, each with different terms and conditions. Additional information is hard to come by. It may be tempting to buy a preferred with a high current yield, but you don't know why the yield is so high or how safe the dividend is; it may be about to be cut, or the stock may be about to be called. Without knowing all the facts, you will be taking unnecessary risks. Instead, you could choose to invest in preferreds through a fund that specializes in them. Typically, a large percentage of a preferred stock fund portfolio is comprised of preferred bank shares.
-
References
- Photo Credit bank image by Pefkos from Fotolia.com
