Lean on Preferreds for Steady Retirement Income | ETF Trends

Investors looking for an income-generating asset class that can bridge the divide between dividend stocks and traditional fixed income instruments may want to consider preferred funds like the Global X U.S. Preferred ETF (Cboe: PFFD).

The ETF, which debuted in September 2017, tracks the ICE BofAML Diversified Core U.S. Preferred Securities Index.

“PFFD pays a variable monthly dividend, though Global X manages the amount to keep payments steady. Payments have been slowly descending, though the overall rate is small per year. The current payment of $.1090 per month has been in effect for the last eight months,” according to Seeking Alpha.

PFFD 1 Year Total Return

Why Go with a Preferred ETF?

PFFD’s underlying index includes different categories of preferred stock, such as floating, variable, and fixed-rate preferreds, cumulative and non-cumulative preferreds, and trust preferreds. Components of the Underlying Index primarily include financials, real estate, telecommunications, and utilities companies.

“The Global X U.S. Preferred ETF offers broad exposure to the preferred share market in the United States, holding close to 300 individual preferred shares,” notes Seeking Alpha. “That is table-stakes in this space. What isn’t table-stakes is having industry-low expenses of just 23 basis points while offering this group’s highest yield at 5.17%! Finally, PFFD offered excellent returns within its peer group. Overall, the fund is a great way to invest in the preferred share space.”

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. 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.

For more on income strategies, visit our Retirement Income Channel.

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.