As you might very well know, real estate investment trusts, also known as REITs, are legally required to pay out no less than 90% of their taxable income. That’s how they’re structured to operate in the U.S., and they’re not allowed to exist as a REIT unless they meet that requirement. This is done in the form of dividends: payouts to their shareholders that make them very attractive assets that can generate a whole lot of growth. 

This fact, and the way that this investment universe seems to keep growing by leaps and bounds, has opened up a sizable market to emerge within the REIT world. By this, I’m referring to REIT preferred stocks, which can be an intriguing additional to just about any portfolio.

While I do fully recognize that preferreds aren’t the most well-understood or the most popular stock market direction to go in, there are a few different reasons why you really might want to consider them after all.

For one thing, preferred stock comes by its name for a reason. Anyone owning those particular certificates of a stock get automatic priority when it comes to shareholder payouts – rain or shine. To be clear, they’re not at the absolute top of a company’s list of responsibilities in this regard. Bondholders do get to go before them in this chain of importance… 

But they’re still likely to get paid in the end in the case of a bankruptcy. Their common counterparts, however, are unlikely to receive anything under that unfortunate set of circumstances. It’s just the way it goes.

Plus, most REIT preferred shares are collective investments. And by “most,” I mean 98%. This means that, if a REIT happens to renege on a dividend in one quarter, it will have to pay it out after all just as soon as its back to paying as planned.

People will happily pay for that kind of security. As well they should up to a certain point and under the right circumstances, of course.

A Particularly Preferred Way of Doing Things

Of course, as with every other investment out there today (or ever), there are pros and cons to buying up preferreds just like there are “good times” and “bad times” to own them. 

For the record, this does not mean by any stretch of the imagination that I support trying to time the markets. Because I most definitely don’t. What I support is having a healthy balance of assets per portfolio so that one segment’s good times outweigh another’s bad. That’s the best way to encourage safe, long-term growth.

With that said, today’s low-yield environment does offer an additional reason or two for investors to buy up preferreds. The way things are right now, they could produce dividend yields of 6% or higher. Which – admit it – sounds at least a little tempting. Doesn’t it?

If you admit that, yes, it does and your personal portfolio isn’t already overweighted in such positions, you might want to consider the InfraCap REIT Preferred ETF(PFFR). It’s an exchange-traded fund that offers an easy way to scoop up a number of REIT preferreds all in one simple swoop. 

Its goal is to match up with the Indxx REIT Preferred Stock Index, which, in turn, seeks to track preferreds with yield-to-calls of 3% or higher. Here are some other things you should know about PFFR… As of March 21, it:

• Contained 85 preferred stocks issued by 41 different companies
• Represented both property REITs and Mortgage REITs
• Had a weighted average yield of 6.67%
• Was representative of a number of real estate industries.

You might also want to look into the Virtus InfraCap U.S. Preferred Stock ETF(PFFA). Like its preferred ETF brethren mentioned above, PFFA is a solid choice when it comes to the ETF way of doing things. 

For those of you who are new to the larger investment game, ETFs act as cheaper, more easily available mutual funds – providing a basket of investments for the price of one.

When it comes to this particular basket, Virtus InfraCap U.S. Preferred Stock covers both mortgage and equity REITs. But it does so in a very selective manner. Its main holdings are in companies that feature market capitalizations of no less than $100 million. So, naturally, it offers attractive yields itself.

As of March 21, PFFA carried 80 preferred stocks issued by 53 publicly traded businesses, and had a weighted average yield of 8.5% (with leverage).