Closed-End Buy for Variable Rate Preferreds
11/03/2017 5:00 am EST
Our model portfolio doesn’t currently have a variable rate depository with a high-yield payout and I find it timely to add one for those investors who want to be in a closed-end fund with a portfolio of floating-rate preferred stocks tied primarily to the banking sector, notes income expert Bryan Perry, editor of Cash Machine.
PowerShares Variable Rate Preferred Portfolio (VRP) tracks the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index, which invests in preferred securities with interest rates that can go up or down over time.
Since we’re in a low-rate environment right now, it shouldn’t be much of a surprise that the fund’s yield is just 4.78%. But this yield could change significantly if the Federal Reserve starts to raise rates. Long-term returns are unavailable, as this fund was started in 2014.
One of the very best places to have capital invested when rates start to rise is within the financial sector. While most bank, insurance and brokerage stocks yield less than 3%, we can gain exposure to the sector by investing in a highly diversified portfolio of floating-rate preferreds issued by many of America’s leading financial institutions.
Most financial companies drive earnings growth by being able to earn more interest on loans and assets. While rates have been so low for so long, these blue-chip companies have been slashing costs and shoring up balance sheets for 10 years since the Great Recession and are now poised to see organic earnings growth accelerate on any gradual increase in Fed Funds and LIBOR rates over the next couple of years.
The fund has been gradually increasing its monthly payout over the past year that is in parity with the past two Fed rate hikes and should continue this rising payout trend as the Fed looks to raise the Fed Funds Rate further in December and in 2018.
Many investors want the equivalent of a high yield money market that will track interest rates higher. This fund is about as close to such an instrument as can be found among the various assets that are structured to serve this purpose.
The fund is just three years old and was launched when Fed Funds were trading at 0.00%-0.25%. It is my view that our timing here is spot on and I’m looking for both a steadily higher payout and capital gains as the financial sector takes flight.