Everyone in the corporate world knows the name, Warren Buffett. The renowned billionaire isn’t only a successful business mogul, but also a talented investor who knows more about the stock market than the most experienced analyst on Wall Street.
Buffett has managed to build his massive net worth from the stocks he purchased decades ago, many of which went up in value by more than 1000%! His shrewd investment decisions hailed him as the world’s most successful investor. Whenever Warren Buffett speaks, investors drop everything and listen.
Follow Buffett’s footsteps if you want to venture into the world of the stock market to start making your passive income and building your retirement fund.
His Investment Portfolio
Warren Buffett is known for owning stakes in giant companies, like Amazon in which he has invested an astounding $900 million. Despite his massive fortune, Buffett continues to seek new investment opportunities and companies that have the potential to grow in the future.
His latest quest involves investing an astounding $10 billion to back Occidental Petroleum to acquire Anadarko Petroleum.
The funds funneled into Occidental Petroleum will enable Berkshire Hathaway to purchase 100,000 shares in the company’s preferred stock. According to sources, these preferred stock yield 8% annual dividend.
While Buffett recommends investing in preferred stocks as a beginner, he reiterates that timing is the most crucial factor in ensuring the success of your investment. Here are some of the biggest benefits and the drawbacks of investing in preferred stocks to help you decide which investment route you should take.
The Benefits
According to the renowned business mogul, preferred shares are suitable for those investors who want to earn consistently high dividends. Buffett says besides yielding higher returns than common stocks, these stocks are also relatively lower in risk which means that investors can have some peace of mind after betting their hard-earned money on these stocks.
The lower the risk, the less likely you are to make a loss on your investment. However, since preferred stocks are still higher in risk than other conservative instruments like traditional bonds and mutual funds.
The Risks
One major drawback of investing in preferred stocks is the interest rate. According to the renowned financial expert Colin Gerrety, the return rates of this form of stock are not guaranteed compared to bonds.
There also exists an inverse relationship between the dividends and the interest rate on preferred stock, which can make it unappealing to most investors.
If the interest rate increases, most investors tend to sell their shares at a lower price, devaluing the stock which in turn decreases the dividends, simultaniously increasing the risk of the stocks being called back by the company. When the interest rate is lower, a firm can recall the stocks and issue new ones with a decreased dividend.
According to financial experts, preferred stockholders don’t have a say when it comes to electing a company’s board of directors. Unlike the common stockholders, they don’t have voting rights. Despite this drawback, though, preferred stock investors earn more because they have lower taxes than other equity investors.