Identifying The Lowest Risk Preferred Stocks

Concerns about investment risk are never far from the mind of investors and preferred stock investors are no exception. Looking over the list of the 1,000+ preferred stocks currently trading on U.S. stock exchanges can be interesting, but evaluating risk can be difficult and time consuming.

Determining risk is, of course, a tricky business starting with the fact that what one investor may consider low risk another investor will see as unacceptably high. By its nature, measuring risk is an effort to quantify the unknown.

We are therefore left with analyzing the past and trying to determine, now that we know the outcome, if there was any indicator along the way that, had we known where to look, would have alerted us to trouble.

Is There An Indicator Of Future Risk?

There are three types of preferred stocks (traditional, trust and third-party trust) and these three types have a variety of characteristics. The type of dividends they pay (cumulative versus non-cumulative), their payment schedules (monthly, quarterly, semi-annually, annually), their ratings (investment grade, speculative grade) and whether or not they can be converted to the company's common stock are all characteristics of each preferred stock issue.

The fact that preferred stocks have these various characteristics allows a preferred stock investor to tailor their choices to more closely align with their individual risk tolerance - a huge benefit that many other types of investors do not enjoy. Since preferred stock investors can use these characteristics to help manage risk, the extent to which a relationship actually exists between these characteristics and investment risk is worth knowing.

Is there such a thing as a bellwether characteristic that, above all others, is an indicator of the future risk of a preferred stock investment?...

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