Yields on U.S. government bonds are near rock-bottom levels, leaving income investors scrambling for ways to augment their portfolios. The Principal Spectrum Preferred Securities Active ETF (CBOE: PREF) is one avenue for doing just that.
Preferred stocks may lack the growth potency of common stocks, but they usually offer comparable volatility traits to corporate bonds and almost always feature higher yields than Treasuries. PREF, which is higher by more than 9% in the current quarter, yields 4.79%.
“Far different from common stocks (the equity form normally referred to simply as “stocks”), preferred shares are something of a hybrid between stocks and bonds. Preferred stocks are technically a form of equity, like common stocks. They’re traded on exchanges, but they’re structured differently to meet different financial goals for companies that issue them,” according to CNBC.
Preferreds Are Pertinent Today
Spreads and interest rate scenarios indicate now may be the appropriate time for investors to consider paring investment-grade corporate debt exposure in favor of preferreds and funds like PREF. Moreover, as an actively managed fund, PREF can avoid trouble spots in the preferred universe, which is meaningful because investors engage with this asset class for reliable income, not distribution cuts.
“For investors, they behave more like bonds, with returns that are almost bond-like in their reliability. Though more volatile than bonds, this relatively small universe of assets (owned primarily by institutional investors) poses less risk than common stocks,” reports CNBC.
Like common stock, preferred stock is issued by a company and traded on an exchange. Preferred stock prices can fluctuate, but most of the returns from preferred stock come from dividends. Unlike common stock, preferred stock dividends are predetermined and paid at regular intervals. These dividends are paid in full before any dividends are released to common stockholders.
Lower correlations to common stocks and traditional fixed income investments also make preferreds attractive portfolio diversification tools. PREF also offers investors some tax advantages.
“After taxes, preferred shares do even better compared with taxable bonds, as many of their dividends are qualified, the long-term rate for which is 15% for most people and about 20% for the upper bracket. Bonds yields are generally taxed at the higher ordinary-income rate,” according to CNBC.
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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.