The Pros and Cons of a Preferred Stock Mutual Fund

Preferred stock mutual fund is a financial instrument that generates dividends and its price has the potential to appreciate under given circumstances. As a general rule, dividends for preferred stocks are paid before dividends for common stock mutual funds are paid. Although a preferred stock mutual fund has many advantages, it is not without disadvantages. Below are some of the pros and cons of a preferred stock mutual fund.

Advantages

As mentioned earlier, one of the main advantages of a preferred stock mutual fund is that it gets dividends ahead of the other types of stocks. In case of liquidation or when the issuing organization falls into hard times and cannot give full service to the investors, the issuing company is obliged to pay their bond holders and preferred stocks investors first before the common shareholders. In the event where the issuing company opts to declare a moratorium on the payment of dividends on preferred stocks, the unpaid dividends accrue and the total amount thereof shall be paid by the issuer when the moratorium expires. As it is, preferred stocks investors do not actually lose their earnings on their investments.

Another advantage of a preferred stock mutual fund is that like bonds, preferred stocks mutual funds have fixed dividend payments. Since these types of stocks have fixed dividend payments, investors are protected from extreme fluctuations in stock prices.

Compared to bonds, preferred stocks mutual funds usually have higher yields so if you want to get more from your investment and you are willing to invest your money on a long term basis, you might want to consider buying preferred stocks instead of bonds. Owing to its potentials for high yields, most income-focused investors put their money into preferred stocks.

When it comes to tax rates, preferred stocks mutual funds enjoy a better tax rate compared to bonds and bond funds.

Disadvantages

There are a number of things that make preferred stocks mutual funds unattractive to investors. First, most types of preferred stocks mutual funds do not have a maturity date, and those that do have a maturity date usually mature in about 30 years, or even longer, so most people who are not into long term investments usually prefer to put their money on bonds instead of preferred stocks. Note that since preferred stocks mutual funds do not have maturity, investors are not certain to get their money on a specific date.

Another disadvantage of preferred stocks mutual funds is that by nature, preferred stocks are callable so the issuer may call the stocks when it sees fit. For instance, if you have a high rate preferred stock mutual fund and the rates suddenly plummet, the issuer may call the stocks by buying them back. When this happens, you could end up investing in a lower-rate environment and losing some money.

If you invest in preferred stocks with a fixed rate, you will mostly be stuck with a low-rate investment for a long time. As mentioned before, preferred stocks either do not a have maturity date or mature in 30 years or more, so your investment will be less likely to grow in the coming years.

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