Flaherty & Crumrine: A "Preferred" Idea for Income

01/04/2021 5:00 am EST

Focus: STRATEGIES

Martin Fridson, CFA

Publisher, Income Securities Investor

Flaherty & Crumrine Preferred Securities Income Fund (FFC) seeks high current income through investment in preferred stocks, convertible preferred issues, and hybrid capital securities, explains Marty Fridson, dividend expert and editor of Forbes/Fridson Income Securities Investor.

The fund — which is five-star rated by Morningstar — invests at least 80% of total assets in a diversified portfolio of preferred investments largely rated investment grade. The fund is leveraged by approximately one-third, allowing for high current income.

We last reviewed FFC in November 2018, lowering our recommendation from Buy to Hold. The change in recommendation was tied to the spike in interest rates at the time, along with our concern regarding FFC’s forward total return.

In hindsight, our move was a bit conservative and, as a result, we are changing our recommendation from Hold back to Buy — particularly in light of the low stable interest rate environment that is likely to continue for the next few years.

The fund’s sector concentration on 09/30/20 consisted largely of Banks (57.43%), Insurance (22.14%), Utilities (7.93%), and Energy (6.02%). The portfolio’s top five issuers were MetLife (4.55%), Citigroup (3.91%), Liberty Mutual (3.86%), PNC Financial (3.67%), and Morgan Stanley (3.54%).

Based on market price, Flaherty & Crumrine Preferred Securities Income Fund, had a total return for 2019 was 25.74% and came to 3.32% for the YTD period ended 09/30/20.

The fund’s distributions are largely qualified and taxed at the 15%-20% rate. This investment is suitable for low- to medium-risk portfolios. With this update, we are also changing the fair-value price to $26.00 from $27.00.

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