John Hancock: Sign up for Preferred Income

10/26/2020 5:00 am EST

Focus: FUNDS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

Preferred-stock closed-end funds (CEFs) are popular with conservative income investors; preferred CEFs, like preferred stocks, tend to be low-volatility investments, observes Steve Mauzy, editor of Dividend Confidential.

Preferred stocks are considered equity investments like common stocks. Preferred stockholders, though, receive priority over common stockholders when dividends are paid (or when company profits are distributed).

Preferred stockholders are favored over common stockholders because the preferred-stockholders rank higher in the company’s capital structure. Thus, preferred stocks are less risky than common stocks. 

Preferred stocks are similar to bonds where income is concerned. Preferred stocks typically pay fixed dividends on a regular schedule. Like bonds, preferred stocks have a “par value” they can be redeemed at, typically $25 per share.

Both can be repurchased, or “called,” by the issuer after a certain period, often five years. (For this reason, many investors prefer to buy preferred stocks in a fund investment as opposed to the individual securities.)

You generally don’t buy preferred stocks for price appreciation. You buy them for steady income. Most individual preferred stocks, preferred-stock exchanged-traded funds (ETFs), and mutual funds pay income to yield 5% to 6%.

John Hancock Preferred Income Fund (HPF) trades at a discount and yields over 8%. What’s more, unlike most preferred stocks, it pays its income monthly, not quarterly. 

Immediate diversification is another draw. The John Hancock CEF portfolio is composed mostly of preferred stocks, which account for 77% of the portfolio.

Another 13% is allocated to large-cap dividend-paying common stocks. The rest is allocated to bonds and convertible securities. The CEF holds 115 different securities. You’ll recognize many of the preferred-stock issuers: Wells Fargo, JPMorgan, DTE Energy, and Southern Company are top-10 holdings. 

The CEF pays higher-yield income compared to the competition because of its judicious use of leverage. A third of the portfolio is leveraged. John Hancock borrows at a low rate, roughly 1.8%, and then invests the proceeds in high-yield preferred stocks that pay 5% or 6%. The spread makes the difference.

The discount is the reason I like the John Hancock Preferred Income today. Its shares frequently trade at a premium to net asset value (NAV). They traded at a 12% premium as recently as July 2019. They recently traded at a 1.6% discount.

The John Hancock CEF offers high-yield income (an 8.2% yield, as I write) paid in monthly installments. The discount offers a promising entry price to realize additional return through share-price appreciation.

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