Wachovia Bank (NYSE: WB ) extended an intriguing offer late last year. The bank asked investors to lend it money by purchasing its preferred stock and promised a juicy 8% yield in return. The quarterly payments qualify for the reduced dividend tax rate, and they're secured by an investment-grade credit rating from both Moody's and Standard & Poor's.

Tempted? With stocks in a slump and bond yields at their lowest level in years, yield-hungry investors are scratching their heads in search of a safe place to park their money. Stock market volatility has been extremely high, but preferred stocks like Wachovia's offer income investors the best of both worlds — a safe income stream and a relatively stable share price.

Why Now?
But Wachovia isn't the only financial firm looking to raise some much-needed capital by issuing preferred stock. Hurt by bad mortgage bets, other cash-strapped banks are shoring up their balance sheets by offering billions of dollars in preferreds. These include names like Citigroup (NYSE: C), Merrill Lynch (NYSE: MER), Bank of America (NYSE: BAC), and Washington Mutual (NYSE: WM). Government agencies like Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and homebuilders like Toll Brothers (NYSE: TOL) are also doing the same.

The increased supply of new preferred stock flooding the market is sending their share prices lower. And since share prices and yields move in opposite directions, the supply surge is also lifting yields to historically high levels. Preferred stocks enjoy a whopping 7.4% yield on average according to the PreferredsOnline Index, and many sport yields in the double digits.

Falling interest rates are another plus to holding preferred stock. Like bonds, preferreds tend to rise and fall with interest rates. When interest rates rise, preferreds tend to lose value against competing investments that offer high yields. But in today's low interest rate environment, with corporate bonds yielding about 5%, high-quality preferreds are the way to go.

For the risk-averse investor, preferreds can also be preferable to high-yielding stocks because payouts are more secure than common share 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 ran into trouble, it must pay preferred dividends before common-stock dividends. And unlike common dividends, preferred payouts are predictable — they don't go up and down with a company's earnings.

The fixed payments also tend to make share prices on preferred stocks far less volatile than common shares. In fact, since being issued in December 2007, Wachovia's preferred shares (NYSE: WB-PS) have been half as volatile as the common shares.

But before you dive into any investment, it's important to check out the fine print. That rule applies even more so to preferred stocks, as there are several options available to preferred investors. . .

Important Note:  In the remainder of this article, High-Yield Investing editor Carla Pasternak explains in full detail exactly what income investors should look out for before purchasing preferred stocks. She also provides a list of nine of the best preferreds on the market — with some offering yields as high as 11.0%. Even better, Carla serves up in-depth profiles of her two favorite preferred issues. However, in order to view the remainder of this article, you'll need to subscribe to our premium income-investing newsletter — High-Yield Investing. After you subscribe, you'll receive immediate access to this full article, as well as our monthly High-Yield Investing newsletter and a host of additional premium content. Please visit one of the following links to continue.