Make Money in These Cash-Spewing Preferred Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add preferred stock to your portfolio, but don't have the time or expertise to hand-pick a few, the iShares S&P U.S. Preferred Stock Index ETF (NYSEMKT: PFF  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. It's a behemoth, with more than $9 billion in assets and a hefty dividend yield near 5.8%.

This ETF has outperformed its benchmark index over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why preferred stock?
Preferred stock isn't likely to appreciate in value like common stock can, but it does offer some nice features that offset that. For one thing, preferred stocks tend to pay heftier dividends, so they serve income seekers well. Holders of preferred stock also get to stand closer to the front of the line, should a company run into trouble and need to liquidate. (Thus, they're "preferred.")

Many of this ETF's components have been making solid contributions to its performance. Below you can see the power of preferred stock, via a comparison of the yield on common vs. preferred stock on some of the components:

Stock

Yield on Common 

Yield on Preferred

US Bancorp (NYSE: USB  )

2.5%

6.00% 

MetLife (NYSE: MET  )

2.3%

6.5% 

Citigroup (NYSE: C  )

0.1%

7.875% 

ArcelorMittal (NYSE: MT  )

5%

6.00% 

Sources: Quantum Online, Yahoo! Finance.

Clearly, you can reap far more income from preferred stock. It's good to read up on preferreds first, though. Understand that higher yields are often tied to riskier companies in order to attract investors willing to take the chance.

US Bancorp is up 11% over the past year. It's well regarded, and known for conservative banking and a strong balance sheet. Its return on equity is far above those of its rivals. The bank is looking to profit from mobile banking, charging fees for check deposits and developing voice-recognition capabilities in its apps, to increase convenience. The company's second-quarter report featured growth in loans and deposits.

MetLife, up 46% this year, has aimed to reduce its regulatory oversight by selling off its banking unit to GE's GE Capital division. It has also stopped selling long-term care policies. Its reputation may have taken a hit, however, on news of a settlement tied to unpaid death benefits. Bulls are hoping for higher interest rates.

Citigroup, up 57% over the past year, posted double-digit growth in revenue and net income in its second quarter. Some are bullish on Citigroup because of its CEO, Michael Corbat, who has been effectively improving the company's balance sheet. Bulls also like its extensive global operations, which should deliver greater profits as world economies develop and grow.

ArcelorMittal's common stock has slid 10% over the past year, as the company has been dealing with a weak global steel market. A vertically integrated giant in steel, it carries a lot of debt and hasn't been producing gobs of free cash flow lately. Rising auto sales bode well for the steel company, though. Some see the stock as undervalued, but it was downgraded by Morgan Stanley last month on concerns about overvaluation. It doesn't help that it is more focused on the U.S. and Europe than China, which can grow faster.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

This isn't the only interesting ETF out there. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.


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