Bond yields remain low, and rising equity prices have made it tough to find common stocks with safe and attractive dividend yields. As such, many investors are turning to preferred stocks or funds that specialize in them. Consider that mutual funds that invest exclusively in preferred stock were recently yielding an average of about 5 percent, twice as much as the typical bond fund.

Although preferred stock has worthy attributes, it’s important to note the negatives as well as the positives.

The Pros. Preferred stock dividend yields are usually higher than bond yields. And the payout is typically contractually fixed, unlike the common stock dividend, which can vary based on business conditions.

Compared to common stock, preferred shares have greater claim on the issuer’s assets. If a company is forced to prioritize payments, bondholders will be paid first, followed by preferred shareholders and then common shareholders.

Many preferred stocks also feature cumulative clauses in their issuance contracts stipulating that if any preferred dividends are missed, preferred shareholders are to be made whole before common stock dividends can be paid.

And preferred stock has tax advantages relative to bonds. While bond interest is taxed as ordinary income, preferred stock dividends are taxed at 15 percent. Granted, this could change if the Bush-era tax cuts are allowed to expire, so the tax situation bears watching.

The Cons. Many preferred stocks are “callable,” meaning they can be forcibly redeemed by the issuer under certain conditions. Some preferred stocks can be called after specific dates, some can be called if they hit a certain price, and others can be called under a combination of factors. Read the prospectus to learn if the preferred stock is callable and what conditions must be met if that’s the case. If the preferred shares are close to being called, you’ll likely want to avoid buying them.

Interest rates figure prominently into a company’s decision to call preferred shares; if rates are low enough that a company can borrow more cheaply in the bond market, it will have an incentive to call in the more expensive preferred shares.

Another potential drawback is that preferred stock generally does not allow for much, if any, upside participation. Since preferred stock dividends are fixed at the time of issuance, they won’t increase beyond the contractual rate, even if a company’s earnings come in better than expected. The share price is also generally capped at the shares’ par value, particularly if the issue is callable.

Finally, since utilities and financial companies are the largest issuers of preferred stock, you might find yourself over-allocated to these two sectors. Utility companies like preferred shares because of their fixed cost of capital, while banks like them because they can be treated as Tier 1 capital, a key regulatory requirement.

But banks might pull back from preferred stock issuance in 2013, when they will no longer be allowed to treat some types of preferred stock as Tier 1 capital. While that’s a negative for investors in bank-issued preferred stock (since much of this is likely to be called), the change could be positive for preferred stocks in general, since this will lower the supply of shares.

Buyer beware: If you’re interested in preferred shares, keep a close eye on your overall portfolio diversification and be mindful of the unique features of each preferred stock issue. Or better yet, consider a top-performing preferred stock fund.