Future Of Financials And Preferred Stock
In the last couple of years, financial stocks have not been performing that well. However, this industry has gotten back on its feet. While certain financial institutions have cut their dividend payments, it was seen that in this particular sector investors did not have that much money tied up. Nonetheless, dividend investors will suffer in the future if they do not own any financial stock. |
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Therefore, dividend investors should be looking at stock of financial companies and institutions if they do not want to face inferior risk adjusted returns. There are many alternatives that dividend investors can opt for. For instance, they could buy financial stock or preferred stock of insurance companies like Chubb or Aflac. These insurance companies pay above average yields and have a history of dividend growth.
The other alternative would be to buy shares in five most important Canadian banks. These are banks that did not suffer in the recent financial sector meltdown that hit North America. Although none of these banks have increased their dividend payouts in the last one year, they did not reduce the payouts. The five major Canadian banks are Toronto Dominion Bank, Bank of Montreal, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia.
Even buying preferred stock of financial companies will be useful for the future. Preferred stock has more rights compared to common stock if a company goes bankrupt. However, preferred stockholder are lower priority than bond holders. Although preferred stock does not give voting rights to the stockholder, it still pays the investor a fixed dividend. In addition, preferred stockholders are paid dividends before common stockholders.
In addition, dividend payouts for preferred stock are not likely to be cut or stopped as long as the company continues its operations. Many investors believe that future for financial companies in the US is bright and therefore, the future for financials and preferred stock is also bright. If companies like Bank of America and Citigroup increase their dividend payouts to the levels that they were paying in 2007, investors will get good returns. However, there is a risk as many of these financial institutions are already paying a lot of money as dividends to the US Treasury. Also, if strategic investors like the Treasury convert their preferred stock to common stock, this will reduce the existing pool of shareholder. And lastly, no one can predict the future of the US banking industry.
Therefore, future of financials and preferred stock is not certain. Just because a bank did not go bankrupt in the recent financial meltdown, it does not mean that it will offer a good long term investment to its investors.
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