Legendary investor Warren Buffett has been on a buying spree. 

Buffett poured $8 billion into new investments in recent weeks alone. But Buffett isn't just buying anything. In fact, his latest investments are quite different from the rest of his bellwether holdings.  While the vast majority of Berkshire Hathaway's portfolio is made up of common stocks, almost all of his recent purchases have been preferred stocks with double-digit yields.

     There are a number of compelling reasons why this little-known asset class is at a historically attractive buy point -- including their higher yields, safer income streams, and price stability.  Obviously, these reasons aren't lost on Buffett.

There are three key advantages that preferred shares have over common shares -- advantages that become even more important in times like these.  They offer investors...

    

1.)  A higher level of protection
     2.)  Significantly much higher yields
     3.)  Greater price stability

    

While preferred shares are bought and sold on all the major exchanges, just like common shares, they come with better guarantees.  For instance, dividends paid on common stock are not guaranteed and can fluctuate from quarter to quarter.  In fact, just last week Bank of America (NYSE: BAC) announced it would cut its common share dividend by -50%! This is one of the largest institutions in the country, and not that long ago, its dividend was thought to be rock-solid.  

By contrast, preferred shareholders are almost always guaranteed a fixed dividend paid on a regular basis. Also, in the event of bankruptcy or other corporate restructuring -- something investors have to think a little more about these days -- preferred shareholders are repaid before common stock owners.

    

These factors make preferreds act a little more like bonds than stocks, and as such, they don't have the same volatility as common shares. So while you might give up a little price appreciation in bull markets, you definitely don't see the same downward pressure in challenging markets.
    But as we'll see, what shareholders might give up in potential appreciation is more than compensated for during this historic opportunity in the sector.  And that was a trade-off Warren Buffett was happy to make when he bought $5 billion of Goldman Sachs (NYSE: GS) preferreds and $3 billion of General Electric (NYSE: GE) preferreds -- with both investments carrying a yield of 10%.
    
Historically Higher Yields for Preferred Shares

   The average yield for stocks in the S&P 500 is currently a miserly 2.8%.  A six-month CD is only a slight improvement with a 3.2% yield.  A 10-year "AAA"-rated corporate bond will let you capture a yield of 4.9%.  Preferred stocks, on the other hand, are currently averaging a 9.0% yield, per the PreferredsOnline Index.

     And of course the best news is that 9.0% is only the average yield.  There are dozens of high-quality preferred stocks paying yields above 10% right now.

   

But don't make the mistake of thinking higher preferred yields are the result of distressed share prices. Instead, a series rate cuts by the U.S. Federal Reserve has been ratcheting down interest rates, driving the yields down on everything from Treasuries to money market accounts.  And uncertainty in the market overall has caused an investor "flight to quality," which has also has put additional downward pressure on government-issued securities.  The effects have been dramatic. A 3-month Treasury bill that yielded 3.2% at the beginning of the year is now yielding 0.5% -- which almost equates to stuffing your money under your mattress. 
     Meanwhile, hurt by the credit mess, cash-strapped banks sought to shore up their balance sheets by issuing billions of dollars in new preferreds.  As the supply of preferred stocks started to rise, two things happened. New issuers realized they had to raise their offering yield to attract buyers, and the share prices of existing preferreds dropped until their yields were competitive with those of newly issued preferreds.   

     There's Never Been a Better Time for Safer Income 

    

      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 service the preferred shareholders before it can even think about paying a dime to common stock investors. 

    

     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%.

  And unlike common dividends, preferred payouts are predictable -- they don't go up and down with a company's earnings.  In fact, a number of banks like 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. 

    

Preferred Shares Are Less Volatile 

    

And after the last few months of whiplash-producing market swings, investors will enjoy the lower volatility of these holdings.  In the last month, we've seen more than our fair share of swings to the downside -- including some historic drop and gains on the Dow.  But while the S&P 500 lost in the double digits in the last 30 days, many investment-grade preferred stocks significantly outperformed that mark. Consider that J.P. Morgan's 8 5/8 Preferred (NYSE: JPM-PI) lost only -1.3% over the last month, and that's before adding in the dividend.     

     Moreover, while they make for a particularly timely investment now, preferred stocks are also a great way to diversify your portfolio to ensure regular dividend payments. After all, many of these securities pay monthly dividends. This is particularly important for retired investors, many of whom depend on their portfolios to pay their regular bills.

Research and data from Amy Calistri of  Global Dividend Opportunities