Nuveen Preferred & Income Securities Fund (JPS) is a closed-end fund (CEF) that aims to invest at least 80% of its managed assets in preferred and other income-producing securities, including hybrid securities such as contingent capital securities, notes Rida Morwa, editor of High Dividend Opportunities.
Notably, ~85% of JPS portfolio securities maintain investment-grade ratings, indicating the higher quality of its overall composition. About 67% of the fund is composed of securities issued by banks and insurance companies. Global and national regulatory bodies closely watch these entities' health and lending potential to prevent a 2008-type event.
The portfolio holds 248 securities using just under 40% leverage. The fund's top 10 positions are preferred securities of leading global banking names and represent ~40% of the total portfolio.
The fund trades at an attractive 9% discount to NAV, making it a bargain for income investors and retirees. The fund's current $0.0435/share monthly distribution translates to a 7.4% annualized yield. It is noteworthy that JPS has paid $16.83 in distributions since its inception in 2002.
In recent years, preferred shares have struggled with low yields as low-interest rates caused preferred equity prices to be bid up, putting downward pressure on cash flow.
While investors are trained to see higher prices as a "good" thing, it is more complicated for fixed-income investments. For fixed-income investors, higher prices result in lower cash flow and lower future returns.
Rising interest rates are "bad" for prices, but they are great for future returns when investing in fixed income. For many years, dividends and interest from fixed-income investments have declined due to high prices and lower yields.
Despite this difficult environment, JPS has outperformed the preferred exchange-traded fund iShares Preferred and Income Securities ETF (PFF) as well as ETFs covering other debt classes like high-yield bonds, investment-grade bonds, and treasuries.
Money invested today receives higher dividends from preferred shares and higher interest from debt. As JPS reinvests the principal, it will be reinvested at higher yields.
At this point, the cost of leverage is feeling most of the impact of rising rates, while the yields of preferreds have yet to see the full impact of those increases. As time goes on, this means that JPS should begin to see its income increase.
JPS, with its portfolio built with quality preferreds from the financial services sector, has outperformed its indexes through a tough period for fixed-income. With fixed-income much more attractively priced today, the outlook for future returns is brighter.
