But, preferred stocks are not for everyone, consider the following risks associated with investing in preferred stocks.
1. Individual stock risks
For the same reason you need to create a diversified stock portfolio, investing in individual preferred stocks comes with issuer risk.
Buy the iShares US Preferred Stock ETF is a better option, although it comes with 0.47% expense ratio.
2. Lower Sharpe ratio
We have discussed before that Sharpe ratio is a more accurate metric to measure risk-based returns. The higher the Sharpe ratio, the better.
A study found that for the period October 2003-February 2011 period, the annualized return for preferred stocks was 4.7%, just slightly higher than the 4.1% return on AAA-rated bonds, and below the 6.1% return on stocks. Since the monthly standard deviation of preferred stocks (6.4%) was higher than for either AAA-rated bonds (1.1%) or stocks (4.4%), preferred stocks produced the lowest monthly Sharpe ratio -- 0.07 versus 0.09 for stocks and 0.15 for AAA-rated bonds.
The bottom line
Preferred stocks' high yields are probably not high enough to justify investing in them. If you want or need more risk than safe fixed income investments offer, consider common stocks.