The weaker dollar, sliding Treasury yields and the Federal Reserve’s inability to raise interest rates to this point this year are combining for a perfect storm for high-yielding asset classes, including preferred stocks.
Last year, exchange traded funds such as the iShares U.S. Preferred Stock ETF (NYSEArca: PFF) and the PowerShares Preferred Portfolio (NYSEArca: PGX) were stung by speculation the Fed would move forward with multiple rate hikes in 2016, but there has not been a single rate increase through the first four-plus months of the year.
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Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Additionally, preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.
While preferred stocks provide investors with an attractive source of yields, potential investors should keep in mind that the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk.
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