Inflation is at historic highs, the Fed will considering raising interest rates at least twice next year, and supply chain issues still continue. Companies that might have been lulled by low interest rate environments and a decade of outperformance are now facing a much less conducive economic environment for growth and profitability.
Investors and advisors who are suddenly much more concerned about the performance of their securities in rising rate environments and record inflation and are looking for a more reliable source of income should consider preferred stocks. These are hybrid investment vehicles that carry fixed dividend rates and have a much higher likelihood of being paid should a company fall on hard times.
“Preferreds have typically demonstrated low correlation to traditional bonds; in addition preferreds offer high yields and have shown resiliency through high periods of volatility,” explained Sandra Testani, vice president, product solutions for American Century Investments in an interview with CBOE at the fund’s launch in February of this year.
Preferred stock dividends are first in line to be paid before common stocks and therefore are a much more guaranteed source of income for investors than common stocks. As markets respond to inflation and look forward to rising rates, this can be a huge boon and provide some security for investors.
“Because of their relatively higher credit quality, preferred securities have historically low instances of dividend impairments,” explained Testani, saying that preferred stocks typically aren’t very sensitive to interest rate changes, as many carry floating or fixed-floating rates, “which help mitigate losses if rates rise.”
The American Century Quality Preferred ETF (QPFF) is an actively managed fund that invests in preferred securities to provide high, sustainable income. The fund is one that focuses on diversification, risk management, and quality in order to provide yield while also balancing the risk/return potential for investors.
QPFF invests in preferred securities that include stocks, hybrid preferred securities with characteristics similar to preferred stock and bonds, floating rate preferred securities, junior subordinated debt, senior notes or baby bonds, re-packaged preferreds, and convertible securities.
The portfolio manager assesses securities based on liquidity, credit risk, size, quality, and momentum while also screening for profitability and leverage. They select securities based on positive yield, quality and valuation metrics for inclusion in the fund.
QPFF carries an expense ratio of 0.32%.
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