Is this a quick (buyable) blip? Or the next bear market?
While the Wall Street suits guess away, we can do better than the buy and hope crowd. After all, why hope when we can secure our retirement with sustainable cash flows? Im talking about yields of 6%, 7% or even 8% or more that barely blink when the markets melt down.
These investments are easy to buy. In fact, we purchase them just as we would a mere common stock. But here, were looking past the obvious to purchase these preferred payouts (yielding 7.4% on average, well talk tickers in a moment).
The Power of Preferreds
First-level investors typically deal with just one kind of stock: common shares.
If you buy into a company such as Apple (AAPL) or Tesla (TSLA), those tickersAAPL and TSLArepresent their common stock. Those shares provide you with (microscopic) ownership in the company, typically some sort of voting rights and, in some cases, a dividend.
But occasionally, to raise cash, companies offer up another kind of stock, called preferred stock. They share some elements of common stock but also have a few things in common with bonds.
Preferreds trade on an exchange, like stocks. Theyre actually known for paying sky-high dividendsand those dividends cant be cut unless the company first hacks common shares payouts, hence their preferred status.
The result is a source of income thats typically more generous than junk bonds that, in most circumstances, trades in a cool, calm and orderly manner. Take the past week, for instancepreferreds held their losses within a couple of percentage points, while the NASDAQ dropped more than 10%!
Preferred Stocks Held Up Better Than Broader Market
Theyre not flawless, of course. Because preferreds trade like bonds, its difficult to squeeze double-digit returns out of them, especially if you rely on index trackers such as the iShares Preferred and Income Securities ETF (PFF).
Also, preferred stocks will trade calmly most of the time, but they can still suffer sharp drops during once-in-a-generation market swings.
PFF Wasnt Immune to 2020s Panic
Thats why I prefer to get my exposure to preferreds from closed-end funds (CEFs). The active managers running these funds can identify mispricings that index funds simply cant, and they can use leverage to squeeze higher yields and better performance out of this otherwise sleepy asset.
Let chat about three preferred dividend funds yielding 7.4% on average.
Nuveen Preferred & Income Term Fund (JPI)
Distribution Rate: 6.8%
The Nuveen Preferred & Income Term Fund (JPI) offers up some of the basics were looking for in a preferred-stock CEF:
- A high yield of nearly 7%,
- A diversified portfolio of mostly investment-grade preferreds,
- Monthly dividends, and
- A slight 1.4% discount to NAV, meaning that youre buying JPIs assets for about 99 cents on the dollar.
Diversification is a strong suit here. JPI is typical in that most of its preferreds are from financial stocks (think: banks and insurers). But well more than a third of the 176-stock portfolio is in international preferreds.
Nuveen Preferred & Income Terms investment mix67% in BBB (the lowest level of investment-grade) and 26% in BB (the highest level of junk)allows it to offer ample yield without stretching for truly low-quality preferreds. That yield also is helped by high debt leverage of about 31%.
The result? JPI can be a lot jumpier than preferred index funds, but the long-term performance speaks for itself.
What Skilled Active Managers Can Do With Preferreds
JPI could be cheaper: Its discount is actually less robust than its five-year average, which sits around 3%. But the biggest hang-up for new money is its limited timespan.
The Term in the fund name refers to the fact that on or before Aug. 31, 2024, JPI can terminate the fund. Thats not as ominous as it soundsshareholders would receive cash equal to the funds NAV at the time. But some funds tend to deleverage close to the termination date, which weighs on returns, and if youre looking for retirement income, you might not want to hold a fund that youll have to change out in four years.
John Hancock Preferred Income Fund II (HPF)
Distribution Rate: 8.2%
John Hancock has cornered the market for high-yield preferreds. In fact, data provider CEF Connect says the four highest-yielding preferred CEFs currently are John Hancock products.
No. 2 is John Hancock Preferred Income Fund II (HPF) at a massive 8.2% yield.
Like JPI, HPFs 115-portfolio is mostly built on preferred stocks on the fringes of investment-grade. However, John Hancocks fund leans more heavily on BB debt (43%) and less on BBB (46%) than Nuveens. Its also far more domestic in nature; 95% of its holdings are from U.S. firms such as CenterPoint Energy (CNP) and Morgan Stanley (MS).
While HPFs returns since inception are commendable, thanks again to high leverage of about 38%, management has really struggled with this downturn.
HPF Has a Lot Less Spring in Its Step
CEFs usually will be a bumpier ride than index funds. But this wide performance gap in such a short time is concerning.
Cohen & Steers Limited Duration Preferred and Income Fund (LDP)
Distribution Rate: 7.2%
Cohen & Steers has made its name on its excellence in real estate investing management, but it has a noteworthy preferred-stock product on its hands in the Cohen & Steers Limited Duration Preferred and Income Fund (LDP).
LDP: Management Makes the Difference
LDPs 7%-plus yield is pretty standard for a preferred closed-end fund, but theres more here than meets the eye. Thats because this is a limited duration fundthe CEFs average duration is typically just six years or less.
Just like youd buy short-term bonds to avoid interest-rate risk, Cohen & Steers Limited Duration Preferred and Income Fund is a way to buy preferred stocks while fending off the Fed.
Thats not exactly a strength given that Jerome Powell has sent interest rates to near-zero and likely wont change that anytime soon. But that makes its outperformance in recent years all the more impressive.
Dont Miss My Crisis-Ready 10% Monthly Payer Portfolio
LDP looks attractive as-is, between its 7.2% yield and 4% discount to NAV thats slightly better than its historical averages. This CEF will really shine when the economy is back up and roaring once more.
That might take some time. Unemployment is still in high single digits, and that job growth is slowing. U.S-Chinese tensions are escalating once more, and a COVID-19 vaccine is still a question mark looming over Wall Street.
Fortunately, you dont have to wait to start accelerating your wealth. My 10% Monthly Payer Portfolio is priced to buy and doesnt require a perfect economic environment to churn out massive income and market-beating gains.
Ive personally hand-picked and safety checked this unique portfolio, from every angle, for maximum safety. That includes a cant-miss 7%-yielding preferred-stock fund thatunlike JPI, HPF and LDPis actually increasing its cash distributions.
These stocks and funds are so cheap that I expect them to easily hold their own if the market limps its way through this election seasonand soar faster than the market if the rally picks up steam!
And well soak up their huge payouts the whole time!
The dividends youll find here are truly life-changing: drop $500K into this powerful portfolio now and youll kick-start a $50,000 income stream. Thats $4,166 a month in regular income checks!
Now is the time to get in, while you can still do so at a bargain. Click here to get everything you neednames, tickers, complete dividend histories and moreinstantly.