I bet you’re pretty happy with your 401(k) right now. And why not? The Dow Jones Industrial Average has gained almost 53% in the past three years!

However, there are some investors—namely folks nearing or in their retirement years—who haven’t participated (as much) in this rally, as they (naturally) became more conservative as they approached those golden years and have focused primarily on income, instead of growth.

That means that many people on this path have relied on dividend stocks or fixed-income investments to supplement their retirement funds. And while those stocks—for the most part—have risen with the tide, there’s one group of dividend stocks that they may be missing out on.

I’m talking about preferred stocks, often called “hybrid” investments, because they have some characteristics that make them act like both stocks and bonds.

But the reason I’m bringing them up right now is that their average dividend yield is 6%-8%—considerably higher than the 1%-1.5% that investors commonly receive on the stocks in the S&P 500 Index.

Did that get your attention?

Let me explain.

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The Benefits of Preferred Stocks

Like common stocks, preferred stocks are an equity interest in a company. However, they act like bonds in that these securities also pay regular interest or dividends. These payouts are based on the face—or par—value of the security on a monthly, quarterly or semi-annual basis.

Another characteristic important to investors is this: Their dividend payments take priority over common stock dividends. That means, if a company runs into cash flow problems, common stock dividends get hit first. For instance, during the pandemic in 2020, companies around the globe cut their common stock dividends by $220 billion!

Now, that can happen with preferred stock dividends, too, and if the stock is considered non-cumulative, investors are out of luck—those potential dividends are lost. However, if the stock is deemed cumulative, the unpaid dividends are considered to be in arrears and accumulate in an account, which then must be distributed to preferred shareholders before any dividends can be paid to common stockholders.

Additionally, if a company files for bankruptcy, preferred stockholders will be paid out before common stockholders. Of course, that doesn’t mean much if a company has a long list of creditors and bondholders who will be paid ahead of the preferred holders. But it is some protection.

The Drawbacks of Preferred Stocks

There are a couple of drawbacks to owning preferred shares:

1. Unlike common shareholders, preferred stock owners have no voting rights.
2. Preferred share prices generally have a narrower range of trading, so they probably won’t appreciate as much as common shares. But on the upside, since they usually trade around par value (their original price), they are also not as volatile as common stocks.
3. Since preferred stocks generally have maturity dates—some as long as 30 years or more—like bonds, they come with interest rate risk. That means when rates rise, the share price generally declines.
4. Also, like bonds, these shares can be called, usually when rates are low.

But for investors seeking higher income, those drawbacks may not thwart their interest in preferred shares. And as I mentioned earlier, the stock market has been on a tear, but preferred shares have not sat static. The S&P U.S. Preferred Stock Index has climbed almost 12% in the last couple of years.

Preferred shares may not be for everyone, but you may want to consider owning a few as an addition to your portfolio that will boost your cash flow.

3 Preferred Stock ETFs to Consider

Of course, an easy way to accomplish that is via an ETF of preferred shares. Here are a few that you may find attractive:

ETF/Symbol	Price ($)	Yield (%)	1-Yr Return (%)	3-Yr Return (%)
Global X SuperIncome Preferred ETF (SPFF)	9.68	6.32	17.73	9.44
Cohen & Steers Preferred and Income Opportunities Active ETF (CSPF)	26.16	5.17	9.47	N/A
VanEck Preferred Securities ex Financials ETF (PFXF)	18.60	6.28	19.06	10.79

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