Common stock is nice. But it has some features that aren’t useful to a casual investor.

For example, unless you’re a major stakeholder or aggressive financial manager, you might not care about company voting rights.

But you probably do care about dividends and financial stability.

In that case, preferred stock might be the best investment you’ve never heard of.

[ad#Google Adsense 336×280-IA]What is preferred stock?

Think of it as a hybrid of a stock and a bond.

It has a dynamic price and can be traded for profit like a stock.

But, at the same time, it pays a set dividend – offering steady income like a bond.

This dividend is prioritized over common stock dividends, hence the name.

Companies prefer to pay these shareholders first. Owners of common stock are paid second.

Now that you understand the basics, let’s look at some of the more unique upsides of preferred stock – and the best ways to invest.

Less Taxes, Less Problems
One perk of preferred stock ownership is a lighter tax burden. In addition to being more reliable, the dividends paid by preferreds aren’t taxed as highly as income from common stocks.

Investors in the top income tax bracket pay 20% on their preferred dividends. Meanwhile, investors in the bottom bracket (15% and below) pay no taxes on their preferred dividends.

This chart breaks down the latest tax policy.

Powerful Buyers

Preferred stock has another interesting advantage over common stock. The market is less chaotic. And bullish periods can get really bullish.

That’s because most buyers of preferred stock are financial institutions – and they buy in bulk. Issuers of preferred stock like General Electric (NYSE: GE) and Bank of America (NYSE: BAC) often sell big batches of preferred stock to these institutions in order to fundraise for large-scale projects.

That means that if you buy in before a bulk purchase of preferred stock, you can ride the institutional wave to sky-high profits.

How to Invest
One word of warning (which is true for both preferred stock and common stock): These instruments are not for the lazy. You must do your own due diligence before buying – always. Preferred stocks are senior to common stocks. But in the event of bankruptcy, they’re still below bonds on the liquidation pecking order. If you’re a preferred owner of a company that goes belly-up, you may get nothing.

When it does come time to buy, you can pick up preferred shares the same way you would buy common stock. Just know that not all companies offer a preferred option. And preferred stocks aren’t always easy to find.

The ticker symbols of preferred stocks aren’t as standardized as common stock symbols. Naming conventions can vary widely across different exchanges and quotation systems. Generally, adding a “+” or “p” to a company’s common stock symbol indicates preferred stock. But one downside of preferred stock investing is that you may have to do a little extra digging.

Fortunately, there are also plenty of funds that cater to investors interested in preferred stock. Two of our favorites are the S&P U.S. Preferred Stock Index (NYSE: PFF) and the Nuveen Preferred Securities Income Fund (NYSE: JPS).

— Investment U Research Team

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Source: Investment U