The income problem. Every financial professional is facing the same dilemma: how do you generate meaningful income for your clients without having to take unacceptable risks, or investing in new, unproven strategies? The answer for many may come from preferred and capital securities.
In the upcoming webcast, Solving for Income: A Preferred Solution, L. Philip Jacoby IV, Executive Director and Chief Investment Officer, Spectrum Asset Management; Marc Drummer, Managing Director and Portfolio Manager, Principal Global Asset Allocation; and Matthew Cohen, Head of Principal ETF Specialist Team, Principal Global Investors, will explain how preferred securities may help benefit portfolios.
For example, the Principal Spectrum Preferred Securities Active ETF (NYSEArca: PREF) can act as a portfolio diversification tool and correlation reducer. Another advantage of PREF’s active management is that the managers can take advantage of value opportunities in an asset class that has been expensive over the past few years. Lack of constraint to an index is a relevant advantage, because PREF’s managers can eschew issuers with shaky financial profiles while focusing on those most likely to make good on dividend payments.
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.
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.
One other fund, the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI), invests in dividend-paying securities at the time of purchase, which include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment.
Financial advisors who are interested in learning more about preferred solutions can register for the Tuesday, November 17 webcast here.