Income investors searching for higher yields and assets beyond bonds often turn to real estate investment trusts (REITs) and preferred stocks, two asset classes known for above-average yields. The InfraCap REIT Preferred ETF (NYSEArca: PFFR) is an example of ETF that combines both investment niches under the umbrella of a single fund.
PFFR follows the Indxx REIT Preferred Stock Index. To be included in PFFR’s underlying index, components must be a preferred security from a U.S. REIT with $75 million or more in market capitalization, an average monthly trading volume of 250,000 shares or more for 6 months and a yield to worst of 3% or more.
“In today’s sustained low yield environment, REIT preferreds provide a unique opportunity for investors to generate high income with dividend yields of more than 6%,” writes Brad Thomas for Forbes. “REIT preferreds have relatively low correlation to the stock market compared to common stocks and also have modest sensitivity to treasury bonds yields compared to many fixed income alternatives.”
REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue is mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends, and receive at least 75% of that income from rents, mortgages and sales of property.
A Pulse On Preferreds
Preferred stocks are a type of hybrid security that show bond- and equity-like 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.
While preferred securities represent ownership interest in a company, preferred stockholders usually have no voting rites with respect to corporate matters of the issuer, but preferred securities have rights and characteristics similar to debt instruments. Additionally, preferred stocks issue dividends on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.
“Consequently, preferred stocks can offer investors attractive income with modest levels of volatility in most market environments,” according to Forbes.
Adding to PFFR’s allure is its diversified portfolio and tempting a 6.64% dividend yield.
“As of September 27, 2019, there were 93 preferred stocks in the portfolio. These preferred stocks were issued by 48 different companies across both property and mortgage REITs. The fund is diversified across various sectors of the real estate industry,” notes Forbes.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.