Exchange Traded Fund for Preferred Stocks (Motley Fool)

Make Money in These Cash-Spewing Preferred Stocks

http://www.fool.com/investing/etf/2013/09/12/make-money-in-these-cash-spewing-preferred-stocks.aspx Selena Maranjian
September 12, 2013Exchange-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.

Retirement Rescue - Annuities (from Bankrate.com)

Check annuities for retirement rescue

By Melissa M. Ezarik • Bankrate.com


In a crowd of average Joes and Janes, you'll be hard-pressed to find anyone who knows a lot about annuities, but you'll likely find plenty with a generally negative feeling about them.

That connotation may be well-deserved, yet in today's volatile investment climate annuities might represent a safe haven.

Tom Warschauer, professor of finance at San Diego State University, says, "The insurance industry has not done a very good job recommending products that specifically fit their clients' needs. They look at what they want to sell and find a place for them in everyone's portfolio."

One big issue has been the lack of transparency about charges embedded in annuity products, and since it's difficult to decipher those costs, "There's a lot of room for abuse," says Warschauer, who's also a professor of finance and director of the Center for the Study of Personal Financial Planning at the university.

Beth Almeida, executive director of the National Institute on Retirement Security agrees. "The costs associated with the purchase of individual annuities eat away at the overall retirement nest egg. So a retiree may get a regular check, but their overall retirement income is diminished."

But in today's uncertain and volatile market, "retirees and near-retirees are likely seeking safe haven," says Almeida. And Warschauer agrees, annuities "have some very valuable uses in retirement planning" in this economic climate.

During your working years, return on investment is generally the primary focus. But in retirement, "the new ROI is 'reliability of income,'" says Robert E. Sollmann Jr., senior vice president of MetLife's Retirement Strategies Group.

"The painful lesson we are learning from today's market is that the conventional wisdom -- 'diversify' -- isn't cutting it. International, commodities, U.S. stocks are all down. The guarantees provided by annuities that can deliver regardless of market performance" are needed to balance a retirement plan, Sollmann says.

Think annuities may be worth a look? With so many annuity types, it's easy to get overwhelmed by possibilities. Here are some directions that experts say pre-retirees and retirees should consider.

Let's start with some basic definitions: Annuities are life insurance contracts sold by insurance companies, brokers and other financial institutions that provide a regular periodic payment to a policyholder for a specified period of time. They are paid for before retirement in exchange for lifetime payments after retirement and are intended to provide a regular level of retirement income to meet day-to-day living expenses.


They come in two general categories:


• Fixed annuity. The insurance company guarantees the principal pays a minimum rate of interest. As long as the company is financially sound, money in a fixed annuity will grow -- and not drop -- in value. The growth in value or benefits paid may be fixed at a dollar amount, at an interest rate, or by a specified formula. The interest rate usually starts out as a fixed percentage and is adjusted annually.
• Variable annuity. Your money is invested in a fund similar to a mutual fund -- but one open only to that insurance company's investors. The amount paid out depends on the performance of that fund.

"I'm a real advocate of fixed annuities," says Warschauer, who compares it to a fixed vs. variable mortgage rate. "It's obvious with a fixed mortgage you're more secure. When you're in your retirement years, you really want to be able to count on the cash in-flow, and the fixed annuity does that." Of course, the fact that it's fixed means it doesn't go up with inflation. His recommendation: Package a growth element within your IRA or 401(k), and then shift money out into immediate fixed annuities for daily living expenses.

On the variable annuity route, consider products that come with bonuses or guarantees such as living benefit riders, says Bayne Northern, a national sales manager for Penn Mutual Life's Annuity Distribution System. Variable annuities that include bonuses "may actually 'replace' what you have just lost in the market."

But guarantees as part of a variable annuity come at an added expense, cautions Peter Miralles, president of Atlanta Wealth Consultants. In addition, he says, "Generally the guarantees are diminished when withdrawals are made while the market value is down."

Shaun Golden of Golden Wealth Management in Riverhead, N.Y., concurs about living benefit riders, which can be found in today's variable annuity contracts, offering a "lifetime of guaranteed income regardless of financial market conditions." Golden, who has positioned a portion of his clients' assets into these types of annuities, says he's getting expressions of appreciation for protecting "the income which we count on each month."

Sollmann says variable annuities with an income rider are worth considering for those who are still saving for retirement who want the potential to grow assets along with income protection, even in down markets.






More annuity choices
Among the many other annuities available:

Immediate (or income) annuity. Available as fixed, variable or a combination of both, the immediate annuity is designed to produce a stream of income soon after its purchase. This option would generally appeal to someone age 60 or older. Deferred annuities can be annuitized to become immediate annuities. Warschauer believes fixed immediate annuities are what near-retirees and retirees should consider first.

Deferred annuity. You give the company a large sum upfront or make monthly payments until you reach retirement age. The money grows tax-free until you retire. This works best for someone who has a big chunk of change to put down and at least 20 years for the money to grow tax-free before setting up a schedule of lifetime payments that would start after retirement.

Lifetime income annuity. This product provides income for the remaining life of a person (or people, if a two-life annuity is purchased), according to the Insurance Information Institute. The amount paid depends on age, the amount paid into the annuity, and (if it's a fixed annuity) an interest rate set by the company. David F. Babbel, professor of insurance and finance at The Wharton School at the University of Pennsylvania, says lifetime income annuities should play a substantial role -- 40 percent to 80 percent of retirement assets -- in the retirement arrangements of most people.

Inflation-adjusted annuity. This feature is one that is added to lifetime income annuities that protects one's purchasing power, regardless of whether inflation or deflation occurs, Babbel says, adding that only a handful of insurers offer this feature. He also suggests seeking an annuity with a preset annual rate of increase, such as 1 percent to 6 percent per year. As an alternative to the inflation-adjusted annuity, he suggests having a fixed immediate annuity with a deferred, flexible premium annuity as a supplement. The flexible premium annuity can be activated as needed, "and if inflation really takes off, you can use the flexible premium feature to increase the size of your annuity," he says.

Seek stability
A final word of wisdom that's especially important in today's market: Be careful whom you do business with. "An insurance company can go out of business," points out Warschauer. "There is no guarantee that if a company goes out of business, they won't take the variable annuity or fixed annuity holders with them."

That's why it's worth taking the time to do some research to find out how solid a company you're thinking of buying from. Check out:

A.M. Best WWW.AMBEST.COM
Moody's Investors Service WWW.MOODYS.COM
Standard & Poor's WWW.STANDARDANDPOORS.COM
TheStreet.com Ratings (formerly Weiss Ratings) WWW.WEISSRATINGS.COM


According to Warschauer, Weiss has had a reputation for doing the best job in predicting failure in insurance companies, although users have to pay to access information. With national firms, he adds, a company being licensed in the State of New York is a good sign of stability, since their insurance commissioner's department is "probably the best known with being careful with regulations."

Regarding worries over financial stability, Warschauer points out that ordinarily the industry purchases each other's customers when a company goes under. "They will buy that package of annuities and take them over. But there have been cases where the annuities have simply failed." Conclusion: Annuities can be a rescue vehicle for many retirees -- just proceed with caution.

Melissa Ezarik is a Connecticut-based freelance writer.