\"Since preferred securities have long maturities, or no maturities at all, they tend to have high interest-rate risk, or the risk that prices will fall when yields rise,\" says Charles Schwab. And in 2022, the Federal Reserve jolted its target Fed funds rate from 0%-0.25% to 3.75%-4.00%, sending high-rate-risk assets including (bonds and preferreds) into the toilet.
But the Federal Reserve signaled in late 2022 that it's getting ready to start taking its foot off the pedal, bringing renewed hope to preferreds. And while you can easily purchase individual preferred stocks in most standard brokerage accounts and IRAs, we recommend exchange-traded funds (ETFs), which invest in baskets of preferreds, preventing any single preferred-stock disaster from undermining your portfolio.
This ETF invests in nearly 500 different preferred stocks, almost entirely from U.S.-based companies. The lion's share of PFF's preferreds (more than 66%) comes from financial-sector firms such as Wells Fargo (WFC (opens in new tab)) and Citigroup (C (opens in new tab)). Another 19% comes from the industrial sector, and 13% comes from utilities. The small remainder is sunk into cash and agency bonds.
PFXF was one of several \"ex-financials\" ETFs that popped up in the years following the 2007-09 bear market and financial crisis. While most stocks took a beating then, banks and other financial-sector stocks were at the epicenter of the crisis. Trust was eroded, so much so that ETF providers knew they could attract assets by offering products that ignored the sector altogether.
VanEck Vectors Preferred Securities ex Financials ETF, which was introduced in 2012, instead has healthy helpings of electric-utility (27%), real estate investment trust, or REIT (17%) and telecommunication services (12%) preferreds, as well as exposure to more than a dozen other industries, such as healthcare equipment, semiconductors and diversified retail.
PFXF's ex-financials nature isn't as important as it used to be. Banks are far better capitalized and regulated now than they were in 2007, so the risk of another near-collapse doesn't seem as dire. That said, VanEck's ETF and its portfolio of roughly 120 stocks is still one of the top preferred ETFs you can buy thanks to a combination of higher-than-average yield and one of the lowest fees in the preferred-stock space.
SPFF invests in 50 of the highest-yielding preferred stocks listed in the U.S. and Canada, producing one of the biggest yields among preferred stock ETFs, at an impressive 7.0% currently. Of course, by focusing on yield, SPFF can sometimes sacrifice quality. Indeed, its exposure to investment-grade preferreds (38%) is considerably lower than PFF (48%), while exposure to junk-rated bonds (36%) is higher than PFF (28%). The remainder of each's holdings are unrated.
PREF's six-person management team boasts an average of roughly 29 years of experience. They're tasked with buying $1,000 par preferreds with \"attractive yields, diversification benefits and reduced risk compared to other fixed-income securities.\"
This is one of the most concentrated preferred portfolios you'll find among these ETFs, at just 84 stocks currently. Nearly three-quarters of assets are dedicated to financials (sound familiar), with 14% more in utilities, 6% in comms, and the rest sprinkled across a handful of other sectors.
PREF does suffer from a fairly low yield for the space. But that reflects an extremely high-quality portfolio where a majority of assets are investment-grade. Most of that (60%) is BBB-rated preferred stocks, but another 13% or so are in A- and AAA-rated preferreds. (The remainder are BB, which is the highest level of junk.)
In a year when prices of both stocks and bonds have fallen in concert, some think preferred equity now combines the best of both worlds for investors with cash to spare who are still wary of taking on the risk of the stock market.
I am the VP for American Association of Individual Investors & AAII Journal Editor. I am also the author of Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio (published by W&A Publishing/Trader's Press). I write about stocks, ETFs, investing and provides insight about individual investor sentiment as well as market and economic analysis.
A preferred stock is different from a common stock in that its owner has no voting rights. Preferred stockholders also have preference over common stockholders in the event a company is liquidated. To make it simple, if a company goes bankrupt and is liquidated, bondholders are paid first, then preferred shareholders and then common shareholders.
Here is a selection of seven preferred stocks expected to pay qualified dividends, all of which are traded on the New York Stock Exchange. The list includes possible capital gains on redemption, based on par and current share prices. It also includes hypothetical returns to call dates.
Looking for the consistency of fixed yield, plus the potential for upside Preferred stocks may be right for your portfolio. There are many approaches you can take with this asset class, but one you should consider is buying preferred stocks trading at a discount.
Bank of America 4.335% Noncumulative Preferred Stock Series NN (NYSE:BAC.PO) is another situation with a moderately high yield, plus a moderately high discount. Issued by Bank of America (NYSE:BAC), this preferred stock yields 5.58% at current prices.
On the other hand, these risks may be more than priced-in. As a cumulative preferred stock, unpaid preferred dividends accrue. PEB.PF also trades at around a 15.75% discount to par value, and has a forward yield of around 7.43%. More research may be warranted, but put it on your watchlist. Risk/return may be still in your favor.
For instance, Public Storage 4.7% Cumulative Preferred Series J (NYSE:PSA.PJ). It currently has a forward yield of 5.22%. This preferred stock also trades at around a 10% discount to par value. Again, like with some of the low-coupon preferred stocks trading at a discount, Public Storage may have little reason to redeem it.
With its forward dividend yield of 6.59%, many investors treat common shares in AT&T (NYSE:T) almost like a preferred stock. They buy it because of the dividend, with little regard for its long-term upside potential.
However, chasing yield has resulted in losses for long-time common shareholders. Investors attracted to the cash flows of AT&T, therefore, may want to consider buying one of its most actively traded preferred shares, AT&T 4.75% Cumulative Preferred Series C (NYSE:T.PC) instead.
The preferred-stock market has suffered one of its worst selloffs in decades as yields on leading bank preferred issues have risen to about 6% from 4%. But with yields now at their highest levels in five years, the $350 billion market has gotten more attractive.
As a result, income-oriented investors have a hard time finding income-producing securities, with most of the higher-yielding common stocks having significant risks attached. Thankfully, another category of equities has historically been an excellent source of stable high-yield income streams, most often featuring a more balanced risk/reward investment case. These are none other than preferred stocks.
Preferred stocks often resemble a bond, as the dividends the company pays out are almost like the coupon payments it would pay as interest on a bond. A company is not allowed to issue dividend payments on its common stock unless it has already settled its preferred stock dividends. Most of the time, preferred stocks are cumulative. This means that if a company struggles for a while and has suspended its common stock dividends while also failing to meet its preferred stock obligations, upon recovery, it first has to settle all accrued dividends on its preferreds before resuming its common stock dividends.
Consequently, preferred stocks offer higher dividend priority than common stock, adding extra layers of assurance that investors will keep receiving their dividends. Additionally, since their returns are almost entirely predetermined, they trade more like bonds, and their price is generally uncorrelated with that of the common stock. Hence, the feature considerably lower volatility levels in times of uncertainty.
Last year, the company made a record net income of $174.3 million as a result of the favorable trading environment. Despite dry bulk rates correcting from their previous highs, they still remain more than three times their historical average. Thus, this year is also going to be wildly profitable for the company. In fact, besides meaning that coverage for its preferred dividends has skyrocketed, the company has started paying a dividend on the common stock as well.
Note that the company has two series of preferred shares. Series C and Series D. Amid enjoying record profits, Safe Bulkers has initiated the redemption of its Series C Preferred Shares in order to get rid of its expensive financing instruments. So far, around 65% of the outstanding Series C Preferred Shares have been bought back. However, Series D will most likely stay on the market. Not only would that require an additional $80 million to buy back, which the company will likely want to use to expand its fleet, but it also makes for a useful instrument in case the company needs financing during a tougher trading period, whenever that might be.
The Gabelli Utility Trust is a closed-ended equity mutual fund managed by Gabelli Funds, LLC. The fund invests in stocks of companies providing products, services, or equipment for the generation or distribution of electricity, gas, water, telecommunications services, and infrastructure operations.
Costamare has four preferred share classes outstanding. These are Series B, C, D, and E. They are mostly similar but differ in their call dates and original yields. The reason that we have selected Series B, in this case, is that while all the others have a higher original yield, they trade at a slight premium. Series B does not really. In the ongoing environment in which shipping companies redeem their preferreds due to their expensive financing rates from the past, buying one of the other preferreds comes with a bit of a risk. If Costamare chooses to redeem, say, Series D the next day after you buy it, you risk losing 2.3% of your principal amid the current equally high premium. This is not going to be the case with Series B, while its 7.5% should still serve conservative, income-oriented investors quite sufficiently. 59ce067264