From meme stocks, options, bonds and mutual funds to investment certificates, precious metals and good old cash, there are innumerable investment opportunities you can take advantage of to start or continue building your personal wealth. Purchasing shares of stocks is one of the most common methods people opt for when they’re first getting into investing, but there are key differences in stock types you’ll want to know about before contracting a purchase.
Shares of stocks fall into different categories: common and preferred shares. Both have certain benefits, but preferred stocks can confer some advantages that you might find extra-appealing. Learn about the differences between common and preferred shares before checking out some of the best funds to purchase right now if you’re interested in investing in preferred shares.
What’s the Difference Between Common and Preferred Shares?
Common and preferred shares are two types of tools for buying into a corporation — each share represents a proportionate piece of ownership in a company. Corporations make shares of stock available for public purchase to raise capital from individual and institutional investors. However, there are important investing-related differences between the types of shares.
Common shares may pay dividends to shareholders, but preferred shares always pay dividends, and — importantly — those dividends are preferred. That means they come first. If a situation ever arises in which a corporation cannot pay all its dividends, the dividends on preferred shares are paid out to those shareholders before any dividends are paid out on common shares. That same sort of preference applies in the event a corporation ever has to liquidate and distribute its assets. Preferred shareholders receive priority in those payouts.
Common shares have an individual share price that goes up and down depending on supply and demand in stock markets (or over the counter). This share price is expressed as a dollar amount. Preferred shares have a par value (price per share) that’s influenced, like bonds, by changes in interest rates. (Typically, the value of preferred shares drops as interest rates increase and, conversely, increase as interest rates fall.) Most commonly, the price of preferred shares is expressed not as a dollar figure per share but as a percentage rate based on the dividend yield: the amount of a dividend divided by the price of the stock. Preferred shares often pay average fixed rates of around 5% or 6%.
Dividends paid by corporations via preferred shares are, with some exceptions, taxed as long-term capital gains, whereas the interest on bonds is taxed as income.
The Best Funds for Investing in Preferred Shares
Compared to the S&P 500’s return of 42% over the past 12-month period, preferred stock exchange-traded funds (ETFs) have lagged in the market, returning 16.4%. Here are half a dozen of the top ETF and mutual fund options to consider if you’re looking for exposure to preferred shares.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
The Virtus InfraCap Preferred Stock ETF was the best-performing preferred stock between May 2020 and May 2021. The ETF has approximately $418 million under management, was established in May 2018 and is issued by Virtus Investment Partners. Over a 12-month period, the ETF’s par value has grown at a rate of 61% and has an annual dividend yield of 7.59%. PFFA invests in preferred shares of American corporations with market capitalizations exceeding $100 million, including real estate investment trusts (REITs).
iShares International Preferred Stock ETF (IPFF)
The iShares International Preferred Stock ETF has approximately $60.5 million under management, was established in November 2011 and is issued by BlackRock Financial Management. Over the past year, the ETF’s par value has grown at a rate of 55.7% and offers an annual dividend yield of 3.18%. IPFF focuses on preferred stocks in companies outside the United States — especially in Canada, but also in the United Kingdom, Sweden and Singapore. Top holdings include a Canadian energy infrastructure provider, a Canadian bank and a Swedish real estate company.
InfraCap REIT Preferred ETF (PFFR)
The InfraCap REIT Preferred ETF has approximately $87.7 million under management, was established in February 2017 and is managed by Virtus Investment Partners. Over the past year, the ETF’s par value has grown at a rate of 31.3% and offers an annual dividend yield of 5.95%. The ETF tracks the Indxx REIT Preferred Stock Index, an index that includes high-yielding and liquid shares issued by American REITs. The ETF’s investments include shares from REITs involved in single-tenant industrial buildings, mortgage-backed securities and commercial mortgage loans.
PIMCO Preferred and Capital Securities Fund (PFINX)
The PIMCO Preferred and Capital Securities Fund had, as of March 31, 2021, approximately $1.9 billion under management with investments in preferred stock, subordinated debt and other equity-like securities issued by financial institutions around the world. In terms of sector diversification, it’s heavily weighted in banking (79.4%). Approximately 54.3% of its investments are in the United States, compared to 24.1% in the United Kingdom, 8.9% in the Netherlands, 4.9% in Spain and 4.6% in Switzerland.
Destra Flaherty & Crumrine Preferred & Income Fund (DPIAX)
The Destra Flaherty & Crumrine Pref & Inc Fund invests up to 15% of its assets in common shares and, in normal market conditions, over 25% of its assets in financial services companies. As of March 31, 2021, 55% of the fund’s investments were in the banking sector and another nearly 19% were in the insurance sector. As of the same date, 70.34% of its assets were in domestic investments compared to 29.66% in international markets. The top three non-United States jurisdictions for investment were the United Kingdom (7.36%), Bermuda (5.18%) and Australia (3.74%).
Nuveen Preferred Securities & Income Fund (NPSAX)
The Nuveen Preferred Securities & Income Fund has an inception date of December 2006 and, as of April 30, 2021, approximately $4.9 billion in net assets across around 200 positions. The fund’s top 10 holdings include investments from HSBC Holdings PLC, Truist Financial Corp, Assured Guaranty Ltd., Lloyds Banking Group PLC, JPMorgan Chase & Co., UBS Group AG, Deutsche Bank AG, Credit Suisse Group AG and CoBank ACB. As of April 30, 2021, 65.1% of the fund’s portfolio is invested in banks, compared to 16.4% in the insurance sector, 9.8% in the industrial sector, 4.2% in diversified financial services and 3.5% in utilities. Looking for a decade-long return? Over the past 10 years, NPSAX has returned 6.91%.