New Year, New Markets: The Case for Preferred Securities

As markets continue to process results of the 2020 election and its potential impact on regulation and policy, one thing is certain: the zero rate environment isn’t likely to go away anytime soon. As yield-starved investors face dwindling opportunities in bonds, financial professionals need to find more attractive income-generating opportunities with acceptable levels of risk.

In the upcoming webcast, New Year, New Markets: The Case for Preferred Securities, Mark Lieb, Founder, President and Chief Executive Officer, Spectrum Asset Management; Jessica Bush, Portfolio Manager, Principal Global Asset Allocation; and Matthew Cohen, Head of Principal ETF Specialist Team, Principal Global Investors, will outline the benefits of including preferred securities in income-focused 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. 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 securities can register for the Thursday, February 18 webcast here.