Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required

by Kristy Shen

In exchange for this downside, preferred shares offer a much higher yield. While an equity index might have a yield of 2 percent, preferred shares tend to pay 4 to 6 percent. They are more volatile than bonds but less volatile than stocks, so they are a way to increase yield without massively spiking volatility. Another upside is that unlike bonds, which pay interest, preferred shares pay qualified dividends. This means preferred shares are favorably taxed, as we talked about in chapter 13. I’ve advised against buying individual stocks, and this goes for preferred shares. Preferred shares are complicated to own individually. Even issues from the same company can behave differently. Some are cumulative, some are noncumulative, some are convertible to common stock, some aren’t, some are fixed-rate, and some float with prevailing interest rates. It’s beyond the scope of the text to define all of the terms here, but I advocate owning preferred shares in an index ETF, the same way I own stocks. That way, you can own the entire market without having to pore over the details of each individual issue.