A Preferred Strategy for Retirement Portfolios

01/28/2020 5:00 am EST

Focus: FUNDS

Robert Carlson

Editor, Retirement Watch

I believe this is a good environment for preferred securities. These hybrids of stocks and bonds had a good 2019. I expect the Fed’s policies will be good for them in 2020, explains income expert Bob Carlson, editor of Retirement Watch.

A preferred securities fund I recommend is Cohen & Steers Preferred Securities & Income (CPXCX). This traditional open-end mutual fund is a global investor. It conducts a fundamental analysis before buying a company’s securities and is looking for undervalued securities.

The fund doesn’t reach for the highest-yielding securities, which often are the riskiest. CPXCX doesn’t try to follow an index, allowing it to ignore low-quality securities that are listed in the indexes.

Not following an index also allows the fund managers to adjust their holdings based on the interest rate cycle and other factors. Preferred securities often offer tax benefits.

Most distributions from preferreds are qualified dividend income that is taxable at the maximum 20% tax rate. This benefit gives preferreds much higher after-tax yields than tax-exempt bonds and many other income alternatives. CPXCX considers taxes when deciding which securities to purchase.

The fund offers multiple share classes. How you purchase the shares determines the best share class for you. I recommend the C class shares in my portfolios because there is no front-end load and the expenses are reasonable. There is a 1% redemption fee if you sell within one year of purchase.

The A class shares (CPXAX) are listed as having a stiff front-end load. In return, the annual expenses are lower. But Fidelity and some other brokers waive the load. Their clients can buy the fund without a load and benefit from the lower expense ratio. If you can buy the A shares without the load, that’s the way to go.

Some brokers (including TD Ameritrade) offer the F class shares (CPXFX) or Z class shares (CPXZX), which have lower expenses than the C shares and no load or redemption fee. If either is available to you, that is the share class to buy.

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