Investor Trading

From the viewpoint of our typical investor of modest means we may say that there are a number of good-grade, low-par-value preferred stocks in which he may safely invest; among these are the stocks of certain very successful public utilities. The return, at least under present market conditions, is in the range between 4 and 5 per cent; these yields lie somewhere between those of good-grade bonds and the better common stocks. Since all fixed charges have been covered over two and one-half times and since these utilities resist successfully the various ups and downs in the general business cycle, these preferred stocks represent good value and may well be included in the investment portfolio of the investor of modest means.
As is the case with all securities, we must emphasize that there is no such thing as a “cheap” preferred stock, nor does the word “preferred” necessarily operate as some sort of magic wand. Those which are of poorer grade will reflect just that appraisal in their prices, sometimes fluctuating within wide limits because of the varying fortunes of their respective companies. Perhaps the best rule to follow would be to insist on good quality; in this way there is at least some insurance of safety of principal, not to mention regularity of income.
It must be remembered that the chief risk in all high-grade securities (bonds and preferred stocks) is not related to the general course of business activity. It is most commonly related to the current rates of interest; in other words, whether money is plentiful or is “tight.” This has already been mentioned in our discussion of bonds; it also applies to the market price and the yield of preferred stocks.
Should a choice be required between investment in bonds and preferred stocks, there would seem to be a number of good reasons to prefer the former. Bond interest must be paid and is a first claim on earnings, but directors may pass a preferred dividend when earnings do not permit payment and force the preferred into arrears.