Investors looking for solid gains have been wringing their hands since the subprime crisis hit last summer. We haven't seen this much volatility in the equity markets for almost 75 years. The S&P 500 is down -10% over the past year. And the prospects for a speedy economic recovery appear slim.

Paradoxically, income investors have something to celebrate lately. The virtual meltdown in the credit markets has resulted in a surprising silver lining; yields on safe, investment-grade preferred stocks have been on the rise. Preferred stocks have always offered better yield opportunities than other asset classes -- but the gap has gotten even wider, thanks to the credit crunch.

As you can see in my chart shows the average yield for stocks in the S&P 500 is currently a miserly 2.17%. A six-month CD is only going to net you 2.78%. And the average bond yield, as measured by the Lehman Aggregate Bond Index, is still only 4.81%. Preferred stocks, on the other hand, are averaging a 6.82% yield, per the the S&P U.S. Preferred Stock Index. Granted, the average

Dozens of high-quality preferred stocks are paying higher-than-average yields, right now.

Too Much of a Good Thing

Hurt by the credit mess, cash-strapped banks are shoring up their balance sheets by issuing billions of dollars in new preferreds. These include names like Citigroup (NYSE: C), Merrill Lynch (NYSE: MER), Bank of America (NYSE: BAC), and Washington Mutual (NYSE: WM). Government agencies like Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and homebuilders like Toll Brothers (NYSE: TOL) are also doing the same.

The increased supply of new preferred stock flooding the market is sending share prices lower. And since share prices and yields move in opposite directions, the supply surge is also lifting yields to historically high levels.

At the same time, the U.S. Federal Reserve has been ratcheting down interest rates, and driving down the yields on everything from Treasuries to money market accounts.

These divergent trends have created an unprecedented opportunity for income investors.   

Preferred Income is Safer   

Not only do preferreds pay higher yields than stocks, but their payouts are more secure than common dividends. Preferred shareholders have a claim to a company's assets ahead of common shareholders -- that's why they're called "preferred." In other words, if a company runs into trouble, it must pay preferred dividends before common-stock dividends. 

While a preferred stock can still default on its payments, ratings company Standard and Poor's classifies this as an "extremely rare" occurrence.  Principal Global Investors estimated the historical default rate for investment-grade preferred stocks was less than 0.2%.

Unlike common dividends, preferred payouts are predictable -- they don't go up and down with a company's earnings. A number of banks like Washington Mutual (NYSE: WM), National City (NYSE: NCC), and Citigroup (NYSE: C) have cut their common share dividends in reaction to the credit crisis - while continuing to pay their preferred dividends at their issued yield, like clockwork. In fact Citigroup is one of the banks that has issued new preferreds this year.    

And after the last few months of whiplash-producing market swings, investors will enjoy the low volatility of these holdings. Preferred stocks are also a great way to diversify your portfolio to ensure regular, timely dividend payments. This is particularly important for retired investors, many of whom depend on their portfolios to pay their monthly bills.

This Opportunity May Not Last

Today's unprecedented gap between preferred yields and the yields offered by other investment-grade securities is currently being driven by a temporary supply increase. As more and more investors gobble up the latest preferred offerings, this gap will start to narrow.

In a recent issue of my premium newsletter, High-Yield International, I profiled one of my favorite preferreds.  It offers an above-average 7.56% yield, and it's backed by an ultra-safe credit rating of "A" from Standard and Poor's.  This Netherlands-based company has doubled its profit over the past four years and you can rest easy knowing that your sizable future dividend payments should be secure.

If you'd like to learn the name of this stock -- plus receive a steady stream of foreign stocks, preferreds, and other investing ideas with abnormally high dividend yields each and every month -- then I'd like to extend you a personal invitation to try my premium investing newsletter . . . High-Yield International. Visit this link to learn more.
      
Significant changes are occurring in the investment world, and my High-Yield International service can introduce you to many other historic opportunities -- opportunities like we're finding in preferred stocks today. I invite you to join me as I scour the world for the best-yielding ideas it has to offer.

Thanks for joining me on my search for today's highest-yielding securities!




-- Nick Lanyi
Editor, High-Yield International