We’ve all heard the saying: If all you have is a hammer, everything looks like a nail. Since dividend investing can be boiled down to a single strategy—generating income—you might assume we don’t need a toolbox full of tools. We know that’s not true.
Yes, I believe your investable dollars can only do two things for you:
And we know that dividend stocks are the key to both.
To build wealth, we reinvest our dividends and unlock the power of compounding. It amplifies your money so you have a larger stack of cash in the future.
To earn passive income today, we look for higher yields without taking on too much risk.
The best way to generate this income is from high-quality dividend stocks. Dividend Kings and Dividend Aristocrats are a great foundation for Bedrock stocks to build future wealth. And REITs, BDCs, and MLPs are a tailor-made way to boost your passive income.
Those are all great tools… but are they the only tools you should have in your income investing toolbox? Of course not.
There are options strategies that will create streams of income from stocks that don’t even pay a dividend. Or supercharge the payout from those that do.
Also check out exchange-traded notes. These are debt offerings or bonds that trade on a public exchange.
And don’t forget about preferred stocks, which is the tool I want to talk about today.
Why Preferred Shares Are Today’s Hidden Advantage
Most shares covered by me here or in the mainstream financial media are common shares. Preferred shares are different from common shares because they:
Preferreds act almost like a hybrid of a stock and a bond. If a company fails and is liquidated, these shareholders would be positioned in the claim line behind the debt holders but ahead of common stock holders.
Why should you be looking at preferred shares right now?
Because the only thing I am certain about for 2025 is higher market volatility. Investor sentiment will continue to move the markets in ways that don’t always make sense. This will be even more true with the changing of the guard in the White House. Tracking the shifts in political winds is a must for both investors and analysts.
Even the safest common stock dividends are not safe from a management cut. And the bluest of blue-chip companies can get hit with bad news that sends shares tumbling.
Preferred shares are different. They have distribution guidelines spelled out in their prospectus. Most preferreds have a fixed percentage yield they pay out every year. This payment is based on the par value of the shares and not the market price.
Some preferreds have a floating rate where the payment is based on a formula. This is all explained in the prospectus and cannot be changed.
The typical floating-rate formula is a set percentage rate plus a benchmark short-term interest rate. The sum is then applied against the par value. In the past, LIBOR was used as the benchmark short-term rate for these calculations. Today, SOFR is the standard.
The par value is the face value of the shares. Investor sentiment cannot change that. When the shares are called or redeemed, the holder will receive the full par value. The market price will change as the market’s perceived value of the shares changes. It’s a secondary market. And a shifting market price means it’s possible to pay above or below face value.
However, this face value also means the majority of preferreds trade in a very narrow range around that value. This stability in value and predictability of the distribution gives you extra peace of mind during volatile times.
A Self Storage Giant with Preferred Offerings
When I think of preferred shares, I always think of Public Storage (PSA). Over the past decade, there have been very few times when I didn’t recommend one of these offerings.
It’s a huge and stable company with a very slim chance it will disappear and we lose our investment. And it always has preferred shares available.
Since PSA is a REIT (real estate investment trust), its common shares currently pay out a solid 4% yield. But the declared rate of its preferred shares ranges from 3.8% to 5.6%. Again, that is based on the par value not the current market value.
Even better, these preferred shares trade in a tight range. The preferred class H shares have a 52-week range between $23.10 and $25.70 versus $256.31–$369.99 for the common stock.
You can see the trade-off here. Low share price volatility means less chance for big capital gains. This is why I always try to get my shares for below par.
If you’re interested in doing your own research for preferred stocks, I recommend Fidelity’s screener. I do not benefit in any way by recommending this tool or an account with Fidelity. But it is one of my go-to tools when looking for new opportunities in the preferred shares universe.
Public Storage preferred shares are one of my favorites, as long as I can get them at or below par and with a yield higher than the common shares. I’m always looking for opportunities in the preferred stock sector and my Yield Shark subscribers will be the first to know when to pull the trigger.
For more income, now and in the future,
Kelly Green
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
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