How to Play it Safe in the Search for Income | ETF Trends

To say the least, the second quarter was unpleasant for dividend investors, but some unique approaches to income, including the Principal Spectrum Preferred Securities Active ETF (CBOE: PREF), can help investors steer clear of dividend trouble while accessing above-average yields.

PREF is actively managed, meaning it can identify quality preferred issuers more readily than index-based strategies and if for some reason a PREF holding comes under duress, the managers can remove it more rapidly than an index fund can. That’s something to consider after the second quarter.

“However, the announcements of Q2 2020 payments that started in March paint a different picture of the second half of 2020,” said S&P Dow Jones senior index analyst Howard Silverblatt in a recent note. “The first half produced USD 14.9 billion in announced increases and USD 42.5 billion in cuts, resulting in a USD 27.6 billion reduction in dividends, with the immediate result of lower declared payments for Q3 and Q4 2020.”

PREF Right for this Climate

Income investors have looked to preferred stock ETFs in their portfolios for a number of reasons. For instance, the asset class offers stable dividends, does not come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, is senior to common stocks in the event liquidation occurs, is less volatile than bonds and provides dividend payments before common shareholders.

Preferred stocks are a type of hybrid security that shows 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. Additionally, preferred stocks issue dividends on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.

“At the moment, the 2020 estimate for payments from S&P 500 issues has improved to a 2% decline in the actual 2020 payment over 2019, compared with May’s decline estimate of a 3%-4% decline. The last down dividend year for the index was in 2009 (-21.07%),” according to Silverblatt.

That’s basically saying what was once bad news is only slightly less bad today, but it’s bad nonetheless. In the current environment of declining common equity dividends in an array of sectors, PREF and the benefits of preferred dividends stand out.

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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.