Investors who are focusing on income generation can take a look at preferred stock exchange traded funds to bolster yields.
For example, the iShares U.S. Preferred Stock ETF (NYSEArca: PFF) has a 6.05% 12-month yield, PowerShares Preferred Portfolio (NYSEArca: PGX) has a 5.94% 12-month yield, Global X SuperIncome Preferred ETF (NYSEArca: SPFF) has a 6.75% 12-month yield, First Trust Preferred Securities and Income ETF (NYSEArca: FPE) has a 5.82% 12-month yield and SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK) has a 5.24% 12-month yield.
Income investors may like preferred stock ETFs since the asset class offer stable dividends, don’t come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, are senior to common stocks in the event liquidation occurs, are less volatile than bonds and provide dividend payments before common shareholders.
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.
Like bonds, preferreds are sold at par value, or offer a fixed or floating rate of income, so prices fluctuate with interest rates, writes William Scapell, director of fixed income and preferred securities portfolio manager at Cohen & Steers, for InvestmentNews.
Preferreds currently offer yields of 350 basis points over 10-year Treasuries and well above the 227 basis-point spread during the pre-financial-crisis period between 1997 through 2007.
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. [Evaluating Preferred ETFs Ahead of a Rate Hike]
Alternatively, investors may also consider the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) in a rising rate environment. Variable-rate preferreds usually trade mroe like bonds with shorter durations, so more conservative investors may find the lower-risk profile more appealing. However, VRP comes with a lower 4.57% 12-month yield. [The Right Preferred ETF Right Now]
For more information on dividend funds, visit our dividend ETFs category.
Max Chen contributed to this article.