The correct answer is     (A.) Preferred Stocks

Buffett capitalized on the chaos in the financial sector by investing $5 billion in Goldman Sachs' (NYSE: GS) perpetual preferred shares. With a 10% fixed yield, the investment stands to throw off $500 million in annual dividends for years to come. And if Goldman buys back the shares, it must fork over an additional +10% premium. Buffett later invested $3 billion in General Electric's (NYSE: GE) preferred shares.

This is hardly the first time that Buffett made bold, calculated bets on these unique, tax-advantaged securities. In fact, he stunned the market by pouring hundreds of millions into 9% convertible preferred shares of Salomon Brothers just before the crash of 1987, and then collected dividends while common stockholders got steamrolled.

Of course, the rest of us aren't going to negotiate the same favorable terms as Warren Buffett -- but that doesn't mean we can't take a page out of his playbook. After all, preferred dividends are far more durable than common share dividends, which can be more easily slashed or discontinued. Preferred shares also have a higher claim on assets than common shares in the event of liquidation.

However, last year was anything but ordinary, particularly for financial firms. Rattled investors dumped their shares and depository institutions flooded the market with newly-minted preferreds to strengthen their weakened balance sheets. Naturally, that gush of supply overwhelmed an already fragile market. As with any supply/demand imbalance, prices went sharply lower, which sent yields shooting in the opposite direction.

Since then, investors have realized that the sky isn't falling and the threat of a systemic collapse has been averted. Confidence and liquidity have sent prices higher in the preferred stock sector, but many issues still trade at sizeable discounts, so the already rich yields could be sweetened by additional appreciation. This is an opportune time for investors to begin putting this stable, income-generating class to work. That's why StreetAuthority editor Nathan Slaughter has scoured the market for standout preferred ETFs that make for a nice portfolio addition. In the latest issue of the ETF Authority newsletter, Nathan explains which ETFs offer the outstanding plays in preferred and takes a closer look at the newest entrant to this field in his "Favorite New Fund" section. To learn more about The ETF Authority, please click here.