Are Preferred Shares a Better Choice for 2012?

With 2012 just beginning, now's a smart time to gauge how the stocks you're interested in are likely to do this year and beyond. By knowing what stock analysts and fellow investors expect from a stock, you'll be smarter about whether you should buy it for your portfolio -- or sell it if you already own it.

Today, let's take a look at the iShares S&P U.S. Preferred Stock ETF (NYS: PFF) . As I discussed last month, preferred shares actually did much better than the common shares of the companies that this ETF owned. But will that trend hold in 2012, or will the ETF lag behind traditional investments? Below, I'll take a closer look at what people expect from the iShares preferred ETF.

Information on iShares S&P U.S. Preferred

Dividend Yield 7%
Dividend Yield for Financial Stocks (common) 1.7%
CAPS Rating (out of 5) ***

Sources: Yahoo! Finance and Motley Fool CAPS.

Will preferred stocks keep outperforming in 2012?
To understand the iShares preferred ETF, you have to recognize that the ETF is highly focused in banks and other finance-related companies. You'll find preferred shares of a few other companies, including General Motors and Apache. But for the most part, as goes finance, so goes this ETF.

As for financials, many expect a rebound from the major stocks in the industry. Bank of America (NYS: BAC) still faces many threats, but analysts estimate its 2012 earnings will be 13 times what it eventually posts for 2011. Wells Fargo (NYS: WFC) and Citigroup (NYS: C) avoided the big earnings drops that B of A suffered in 2011, but they're also seen having reasonable earnings jumps for 2012 as well. Revenue growth will be hard to come by, but more efficient operations should filter down to the bottom line.

Meanwhile, insurance stocks also can expect better days in 2012. Barring a repeat of the cataclysmic events that produced catastrophic losses last year, insurers should benefit from stronger pricing. MetLife (NYS: MET) expects modestly stronger earnings on a small jump in sales, matching what many other industry peers are seeing.

What all that means for the iShares preferred ETF is that with slow and steady growth, common shares of financial stocks aren't as likely to post the huge gains they did in the market rebound in late 2009. Because preferred shares typically don't give much upside growth potential anyway, their higher dividends should prove the deciding factor. That could make 2012 another smart year to own preferreds over common stock in the sector.

Still, if you have your heart set on bank stocks, we won't stop you -- but make sure you pick the right ones. Join the thousands who've already read The Motley Fool's latest special report on the financial industry to find out which banks the smartest investors are buying now. The report is free, but it won't be there forever, so check it out today.

Click here to add iShares S&P U.S. Preferred ETF to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Citigroup, Bank of America, and Wells Fargo, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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