Barron's notes yields on preferred stocks of many financial-sector companies are up about 1% since the summer after financial issues fell out of favor amid an ongoing credit crisis. Preferred stock of companies like Citigroup (NYSE:C), Freddie Mac (FRE), Lehman Brothers (LEH) and Merrill Lynch (MER) today yields 7.5%-8% vs. the 4.5% yield of 30-year T-Bonds. While there is always the risk that troubled companies cease paying dividends, it is unusual for them to do so on preferred stock short of complete catastrophe, even when they cut or stop dividends on common shares. Investors betting on a WaMu (NYSE:WM) recovery can earn 7.75% on its convertible preferred shares, while gaining the option of converting shares to common stock at $21.25 (current=$14) if the company recovers.
The preferred stock of REITs like Vornado Realty (NYSE:VNO), SL Green Realty (NYSE:SLG) and Taubman Centers (NYSE:TCO) also looks attractive as investors fret a distressed real-estate market. So, Barron's says, do regular bonds of companies like Comcast (NASDAQ:CMCSA), General Motors (NYSE:GM) and Ford (NYSE:F) -- the last two carry double-digit yields. "Assuming banks and securities firms remain solvent and interest rates don't rise sharply, preferred stock could prove rewarding for income-oriented investors."
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