When the coronavirus pandemic triggered a stock market crash in the first quarter of 2020, I — for the first time — added individual preferred stocks to our recommended list, recalls Tim Plaehn, editor of The Dividend Hunter — and a participant in The MoneyShow Orlando, October 30 to November 1. Register here.
Now, more than two years since I first recommended an individual preferred stock, I am more convinced than ever that preferred stock investments, both individual stocks and those with a fund, should be a significant portion of your income-focused portfolio.
Typically, most preferred stocks will trade around the par value (typically $25) with yields close to the coupon rates. Prices will fluctuate to reflect changes in market interest rates for similar securities. With interest rates rising this year, preferred shares have gone from trading at a premium to par prices to many issues trading at a discount.
We invest in individual preferreds for stable, high-yield income. Once you buy shares, expect to hold them for the long term. Reasons to sell would be if the shares are trading well above par and are callable, or something materially changes with the issuing company. Also, it is possible, but not guaranteed, that preferred shares get called in.
Preferred share dividends are fixed and will not change. They won’t be reduced and won’t be increased. The income stability is why you have a portion of your portfolio in preferred stocks. The more you want that stability, the larger amount of your portfolio can be invested in preferred shares.
Individual preferred stocks offer a safe, high-yield income stream. If you have a smaller portfolio and building for the long haul, you can get preferred stock exposure with the Virtus InfraCap U.S. Preferred Stock ETF (PFFA), which was added to our recommendations list soon after the fund launched in 2018.
Before the folks at InfraCap launched PFFA, the primary option for investors to get preferred stock exposure from an ETF was the iShares Preferred and Income Securities ETF (PFF). PFF operates as a traditional, index-tracking ETF, which means there is no active management, and the fund owns just about every available preferred stock, whether it is a good investment or not so good.
In contrast to the mindless index tracking of PFF, the PFFA managers use an active management approach to look for the best opportunities in the preferred stock universe. In addition to being actively managed, the PFFA portfolio uses moderate leverage and sells options to boost returns. Since I added PFFA in December 2018, the fund’s average annual return has been double PFF’s.
PFFA pays stable monthly dividends. The current monthly rate is $0.1625 per share, which gives a current yield of about 8.7%. The dividend was increased by 1.5% in January this year. The fixed stable and monthly dividends make this fund an excellent choice for automatic dividend reinvestment. You can watch your investment income grow month by month.
On the other side, the stable monthly dividends make PFFA a good candidate for someone in retirement who needs that time of income from their retirement savings. Overall, PFFA provides us with a stable, high-yield investment. (For disclosure, Tim Plaehn holds a personal long position in PFFA.)