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By Robert Brokamp

Preferred stock. Many beginning investors mistakenly believe that preferred shares are the same as common shares, just with higher dividends. Although called "stock," preferred stock is actually a hybrid between a stock and a bond. It is called "preferred" stock because preferred shareholders have claims to the assets of a company in the case of a bankruptcy liquidation that are superior to the common stock holder -- meaning that they get any proceeds before common stock shareholders do.

Preferred stock always carries a dividend, although the company can elect not to pay this dividend if it does not have the financial resources. However, another benefit of the preferred share is that the dividends are often "cumulative." Before the company can pay a dividend to the common stock shareholders, it must completely catch up on any missed dividends for the preferred shareholders.

As a hybrid security, preferred stocks do not appreciate as much as common stocks if the company that issued them improves financially, except in rare circumstances or if there is a "conversion" feature. Convertible preferred shares can be "converted" into a set amount of common stock when certain conditions are met. A company may also choose to "retire" its preferred shares, buying them back in order to stop paying the dividend. This often includes the payment of a premium on the current share value.

Real Estate Investment Trusts (REITs). REITs are a specialized form of equity that allows investors to own a portion of a group of real estate properties, although many investors think of them as an alternative to bonds. REITs have become increasingly popular over the past decade. Granted special tax status by the Internal Revenue Service, REITs pay out at least 95% of their earnings in the form of dividends to shareholders, often offering healthy dividend yields of the same magnitude as bonds. Even better, as REITs acquire more property and increase the value of the properties they own, the value of the equity increases as well, providing a nice total return. For more information on REITs, check the website of the National Association of REITS (NAREIT).

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