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I hate bonds. Well, I guess hate is too strong a word. I just don’t like them for younger investors. I understand their importance in a long term portfolio, diversification, stability, income, etc. But with bond yields at such pitiful levels and talk of a dreaded ‘bubble’, I just don’t find the thought of sinking 20%-30% of my portfolio into this mundane asset class appealing. The risk reward is just not there, especially when the DJIA is yielding roughly 3%. Personally, I have more faith in the management of Procter & Gamble (NYSE:PG) than the US government.

Nonetheless, I will concede the importance of the diversification of assets. I’m just not comfortable getting long bonds or bonds funds. I prefer to take the middle ground. Preferred shares are a financial instrument that functions as both debt and equity. Preferred shares usually provide a higher yield than common shares but have little beta when it comes to capital appreciation. For more information on Preferred Shares I would suggest utilizing Quantum Online, an excellent resource on the topic (see here).

One of the main drawbacks of Preferred Shares is their lack of liquidity. Getting in and out of these stocks can be very, very time frustrating. For this reason I prefer to invest in Preferred stock through ETFs. The three funds that I actively track are iShares S&P U.S. Preferred Stock Index ETF (NYSEARCA:PFF), PowerShares Financial Preferred Portfolio ETF (NYSEARCA:PGF) and PowerShares Preferred Portfolio ETF (NYSEARCA:PGX). These three ETFs offer wide exposure to Preferred stocks and provide large, monthly dividend payments. Currently, the Preferred ETF I find most intriguing is PGF.

PGF is trading above its 50dma, and is testing its 52 week highs. This can be read as either a positive or negative. No one wants to be caught buying high and selling lower. For PGF however, I look at it as a positive. This is an ETF that is primarily exposed to European financial stocks. During the faux euro crisis PGF was punished due to fears that banks were going to start closing quicker than Krispy Kremes in 2008. Now with fin-reg out of the way, the euro stress test relatively successful and Basel III coming in toothless, I think the fear is coming out of the euro banking sector. Money will continue to poor into PGF. Furthermore, at $18 a share PGF is yielding roughly 7%.

I plan on initiating a small position in PGF. It satisfies three holes in my long term dividend portfolio- financial, bond and foreign exposure. I believe the latest jump in share price is due to the ETF being severely oversold and I am completely comfortable initiating a position at these levels. Additionally, this investment will be set up in a DRIP plan to let the monthly dividends compound more rapidly.

Disclosure: Author is long PGF

Source: I Prefer Preferreds Over Bonds