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Preferred Plays for Income

12/06/2019 5:00 am EST

Focus: BONDS

Robert Carlson

Editor, Retirement Watch

I recommend adding preferred stocks to all our portfolios. While most fixed-income investments sold off after the Fed’s announced new policy, preferred stocks have held up much better, explains Bob Carlson, editor of Retirement Watch.

I expect that to continue. An environment of low interest rates, low growth and low inflation is a good one for preferred stocks.

One preferred stock fund I recommend is Cohen & Steers Limited Duration Preferred & Income (LDP). This is a closed-end fund that has been in our portfolio for a while. I now recommend it for the Sector, Balanced and Income Growth portfolios.

As the name implies, the fund focuses on preferred securities that are less likely than others to be hurt if rates rise. That gives us an additional margin of safety.

Also, the securities are selected when the fund managers conclude, after doing their fundamental analysis, that the securities have reasonable credit quality in addition to attractive yields.

Further, LDP takes a global approach instead of limiting itself to U.S. issuers. The fund also develops an outlook for the economy and incorporates the economic outlook in its security selection.

LDP uses leverage to increase yield and capital gains, with a yield ratio recently around 29%. The amount of leverage is increased or decreased by fund management as market conditions warrant.

The fund gained 1.89% in the last four weeks and 25.13% for the year to date. The distribution yield was 7.31%. LDP recently traded at a 2.40% discount to net asset value, which compares with a 1.70% average six-month discount.

I also recommend Cohen & Steers Preferred Securities & Income (CPXCX). This is a traditional open-end mutual fund. Like Cohen & Steers Limited Duration Preferred & Income, the Preferred Securities & Income fund doesn’t try to follow an index. It won’t own poor-quality securities simply because they’re in an index.

The fund managers also develop a broad economic outlook, and then they adjust the portfolio based on how that outlook will affect different sectors and companies.

The fund had a return of 1.23% in the last four weeks and 15.18% for the year to date. The recent distribution yield was 5.38%. The shares have a 1% redemption fee if you sell within one year of purchase.

There are different share classes available with different expenses and fees. See if your broker or other financial intermediary offers the F class shares (CPXFX) or Z class shares (CPXZX). These have lower expenses and no redemption fee.

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