Retirement comes for all of us; whether we prepare appropriately for it is a different story. But we all have time to ensure our income is sufficient to last our entire lives.
The first step to living a great retirement is determining how much income you need. Then, you can choose the instruments that best suit your retirement needs.
Income investing is my favorite type of income to use during my retirement. However, it requires me to invest my money in securities I believe to be solid.
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Understanding the various types of income investing products can be unnerving, especially when the quality of your retirement depends on your choices.
For this series, I want to dissect each type of income-investing product in detail. This will give you enough information to conduct further due diligence on your own. Let’s begin.
What are preferred shares? One of my favorite types of income products is preferred shares. Preferred shares sit higher on the capital stock than common stocks but fall under bonds.
Because of where they sit, preferred shareholders would receive settlements before common shareholders if something negative happened to the company.
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Also, companies can only stop paying preferred shares once they first cancel dividends on their common stocks. This gives preferred shares a higher level of security against common shares.
What I love about preferred shares. I love preferred shares because they are just like gift cards. Their par value is typically $25, but you want to buy them at a discount.
For example, let’s say an AT&T (T) preferred share has a par value of $25 but sells for $21. You would receive the same income but at a much lower price—how amazing is that?
I love preferred shares because it is easy to start a collection by investing $25 to $100 a month.
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It’s tough to find preferred shares. However, it’s tough to find preferred shares. I wrote a series about preferred shares that can give you some insight into how to find them.
- Preferred Shares 101: Getting Started with Preferred Shares
- Preferred Shares 102: Terminology is Important
- Preferred Shares 103: The Rule of 72
- Preferred Shares 104: The Search for Shares
- Preferred Shares 105: Long-Term Preferred Strategy
I like to watch for income-focused articles on Seeking Alpha and The Preferred Stock. Together, I can follow excellent prices on preferred stocks.
Once I find something I like, I buy at least one share. This helps me track that particular preferred share in the future until I can build a full position.
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Individual preferred shares vs. Preferred funds. I would always recommend buying individual preferred shares because that’s how you get the best discounts.
However, you can also purchase them inside exchange-traded funds (ETF). My favorite preferred ETF is Virtus InfraCap US Preferred Stock ETF (PFFA).
PFFA uses leverage and is actively managed, meaning someone makes excellent purchasing choices for you. All you must do is sit back and enjoy the ride.
You can simply dollar-cost average into PFFA every month to build a nice income stream for retirement. Sometimes, less work equals more time for fun.
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Using preferred shares for retirement. Okay, now for the main event—understanding how to use preferred shares during retirement.
The first step to becoming an income investor is building a large emergency fund, usually 1-2 years of expenses.
As much as I love income investing, there are times when the stock market can work against your vision for retirement.
Once you have a fully funded emergency fund, it’s time to buy some preferred shares. It’s tough to start a significant position in preferred shares immediately.
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You want good companies that are on discount. Therefore, it takes time to buy quality preferred shares, so prepare to do it over a year or two.
You should also understand that preferred shares trade versus treasury bond yields. Investors always compare their risk versus the risk-free yields the treasury bonds offer.
A quick example. Therefore, when the 10-year Treasury Note yields 5%, that puts downward pressure on preferred shares prices.
If a Bank of America (BAC) preferred share has a par yield of 5%, it’ll need to become higher for investors to buy it versus a 5% treasury yield.
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Investors will probably jump on the BAC preferred share at 8%. That means the price would have to decrease for the yield to increase (price and yield move in opposite directions).
Follow yields in retirement. As an income investor in retirement, you’ll need to follow yields almost daily.
You should always know the Federal Funds Rate—this is non-negotiable. You simply cannot navigate the world of finance without following and understanding interest rates.
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You also need to know the current rate of inflation. If the current rate is 6%, find preferred shares offering 8-10% yields.
This may push you to companies that you have never heard of before. Conduct due diligence on these companies, then initiate small positions.
I have preferred shares from large Fortune 500 companies like Public Storage (PSA), Bank of America (BAC), and AT&T (T).
However, I also have many solid preferred shares from smaller companies I have grown to trust over the years.
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You will likely find higher yields from lesser-known companies. As a retiree, you have nothing but time to conduct research and make small purchases.
Conclusion. Investing in preferred shares is all about finding them, conducting your due diligence, and starting a small position to learn more about the company over time.
I love preferred shares because they will bring you to the far reaches of the stock market. You’ll find companies you would have never discovered on the standard path of common stocks.
Income is the most critical part of a Happy Cash Flow Retirement, and preferred shares can significantly grow your revenue.
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You’ll want to reinvest at least 25% of the total as you receive more income from preferred shares. This ensures you keep growing your pot of preferred shares.
If a company redeems its preferred shares, you’ll get the par value (usually $25). So, if you bought for $20, you’ll receive a handsome amount of capital gains.
There is no better feeling than getting preferred shares at a steep discount and then watching the price recover. You get high yields plus capital appreciation; what a great way to spend retirement.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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