Make Money in Cash-Spewing Preferred Stocks the Easy Way

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Exchange-traded funds offer a convenient way to invest in various kinds of investments that interest you. If you're thinking that you'd like to add some preferred stock to your portfolio, for its income-producing potential, the iShares S&P U.S. Preferred Stock Index (NYS: PFF) ETF could save you a lot of trouble. Instead of trying to figure out which companies' stocks will perform best, you can use this ETF to invest in several dozen of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Preferred Stock ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. Its dividend yield over the past 12 months has been almost 7%.

Don't compare this ETF's performance with the performance of regular stocks. Preferred stocks generally offer superior dividend yields, but less capital appreciation. Still, with the stock market having seen big moves up and down in the past three years, preferreds have done quite well compared to the S&P 500 during this ETF's short history. As with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Many of this ETF's components have been making strong contributions to its performance. Below you can see the power of preferred stock, via a comparison of the yield on common vs. preferred stock on some of the companies this ETF invests in:

Fifth Third Bancorp (NAS: FITB) 2.9%7.2%
Bank of America (NYS: BAC) 0.8%7.9%
Citigroup (NYS: C) 0.2%8.5%
Wells Fargo (NYS: WFC) 2.0%7.2%
Apache (NYS: APA) 0.7%5.5%

Sources: Quantum Online, Yahoo! Finance.

Clearly, you can reap far more income from preferred stock. It's good to read up on preferreds first, though. You need to understand that higher yields are often tied to riskier companies, in order to attract investors willing to take the chance. If a company goes belly up, it will have trouble meeting its financial obligations to investors. Preferred shareholders get to stand in line ahead of common shareholders, though -- thus their designation as "preferred." (Preferred shares also don't offer as much potential for share-price appreciation as common-stock shares do. They can be great for income, but not for growth.)

Fifth Third Bancorp got whacked by the credit crisis, but is regaining its footing. Recent reports show its credit quality improving as its percentage of bad loans drops. Along with fellow regional banks such as Huntington Bancshares (NAS: HBAN) , it's negatively affected by the Fed's recent "Operation Twist" low-interest-rate policy. Similar things are happening with big banks such as Bank of America, Citigroup, and Wells Fargo.

In the non-banking arena, Apache has been performing well, enjoying high oil prices and record production levels.

The big picture
A well-chosen ETF can grant you instant diversification into your desired niche -- and can make investing in and profiting from it that much easier. If you haven't looked into preferred stocks before, this ETF can give you a window into preferred investing, letting you invest in a bunch at once, without risking too much on any one security.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time this article was published Longtime Fool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Bank of America, Huntington Bancshares, Fifth Third Bancorp, Wells Fargo, and Citigroup, as well as having created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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