To bolster investment yield, many credit unions hold preferred stocks as part of their employee benefits pre-funding portfolios, but preferred stocks aren't for everyone, and credit unions should be leery about having these securities in their portfolio. Despite the attractiveness of their dividend yields, there are risks and limitations to what preferreds can do for a portfolio, and the high yields they offer aren't sufficient to justify investing in these securities.

What Is a Preferred Stock?

Preferred stocks are a class of equities that sit between common stocks and bonds. Like stocks, they pay a dividend that the company is not contractually obligated to pay. Like bonds, their dividends are typically fixed and expressed as a percentage rate. Preferred shareholders receive preference over common stockholders, but in the case of a bankruptcy bond holders would be paid before preferred shareholders. Unlike common stock shareholders, who benefit from any growth in the value of a company, the return on preferred stocks is a function of the dividend yield.