Looking for a steady income? Preferred stocks are one of many types of tools that can help.
Today we will look at the characteristics of preferred stocks and two exchange-traded funds (ETFs) to gain exposure.
It is important to note that preferred securities may have different characteristics in different countries. Our discussion revolves around the shares issued in the US.
Preference Stocks: Advantages and Disadvantages
Preference stocks have characteristics of bonds, which pay a fixed income, and stocks, which represent ownership in a company. Holders, who usually buy them for income and not necessarily for growth, are entitled to dividend payments on a set schedule, similar to interest payments on bonds.
The banking sector is currently the largest segment of the US preference universe as many banks issued preference shares following the subprime crisis and economic contraction more than a decade ago. This is one of the best ways for banks to meet the higher capital requirements imposed by regulators.
While corporate earnings do not have much of an effect on the price of preferred stocks, interest rates and creditworthiness are important factors.
In bankruptcy and liquidation, preferred shareholders have priority over common shareholders. This higher claim on a company's assets is part of the reason for the term & # 39; preferred & # 39 ;.
But they are behind creditors, so preferred shareholders are paid only when there is money left after all senior creditors have been paid off. Because of this subordination risk, preferred stocks pay higher rates than bonds of the same corporate entity.
Another reason for the higher dividend rate: preferred shares are callable, so while preferred shares do not have an expiration date, they are typically issued with a five-year call fee. If interest rates fall, the preferred stock can be traded at a premium and can be easily called (redeemed) by the issuer at par.
For example, if the callable preferred stock in the market has a dividend of 5% with interest rates falling to 1%, the issuer can purchase outstanding shares. It then reissues new preferred stock at a lower dividend rate. Such a step helps the company to reduce the cost of capital. However, the original shareholder is disadvantaged.
Finally, there may be tax breaks over preferred stock dividends for US investors who may wish to consult their accountants or financial advisers.
With that in mind, here are two preferred stock ETFs that allow investors to purchase a portfolio of preferred stocks:
1. Invesco Preferred ETF
Current price: $ 14.73
52 Week Range: $ 9.71 – $ 15.28
Dividend Yield: 5.04%
Expense ratio: 0.50%
The Invesco Preferred ETF (NYSE 🙂 provides exposure to US dollar fixed income preferred securities issued in the US. The fund started trading in 2008 and rebalances monthly.
PGX, which has 306 holdings, tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index. The fund is heavily weighted by financial services (63.35%), followed by utilities (13.72%), real estate (8.69%) and communications services (7.17%).
Preference Stocks issued by Citigroup (NYSE :), Wells Fargo (NYSE :), JP Morgan Chase (NYSE :), Bank of America (NYSE 🙂 and PNC Financial Services Group (NYSE 🙂 top the list. of participations.
So far, PGX is down about 1% in 2020. Below we have listed the current dividend yield (DY) and the year-to-date (YTD) price change of those five companies. The numbers can help investors analyze the fund's returns better than owning the actual shares of companies in the fund.
C – DY at 4.69%, YTD at 45.53%;
WFC – DY at 1.75%, YTD at 57.6%;
JPM – DY down 3.59%, YTD down 28.0%;
BAC – DY of 2.98%, YTD decreased 31.46%;
PNC – DY down 4.1%, YTD down 29.8%.
Different readers may come to different conclusions by looking at these numbers. Our first consideration would be to define investment goals and time horizons before allocating capital to an asset group. It is also important to value the risk / return profile of different assets.
2. iShares International Preferred Stock ETF
Current price: $ 14.31
52 Week Range: $ 8.38 – $ 15.71
Yield: 4.56%
Expense ratio: 0.55%
The iShares International Preferred Stock ETF (NYSE 🙂 provides exposure to preferred stocks outside the US, ie primarily in Canada (83.26% of assets) as well as in the UK, Sweden and Singapore .
IPFF, which has 82 holdings, tracks the S&P International Preferred Stock Index. Top holdings include preferred stocks issued by TC Energy (NYSE :), Klovern AB (ST :), Canadian Imperial Bank Of Commerce (NYSE :), Bank of Nova Scotia (NYSE :), Royal Bank of Canada (NYSE 🙂 and Bank of Montreal (NYSE :).
In total, financial institutions make up 63.8% of net assets, which equates to $ 38.5 million. Next in line are industry and services (25.71%) and utilities (5.34%). Since the beginning of the year, IPFF is down 7.44%.
Below we have listed the current dividend yield (DY) and year-to-date (YTD) price changes of four of the top positions in the US. As in the case of PGX, these measures can provide a better indication of the return of the fund compared to holding the actual shares of companies in the fund.
TRP – DY of 5.63%, YTD decreased 19.4%;
CM – DY of 5.7%, YTD down 8.05%;
BNS – DY down 6.41%, YTD down 25.07%;
MET – DY down 5.23%, YTD down 20.49%.
Given the fund's exposure to Canadian-based companies, we will also look at the YTD and dividend yields of three other ETFs targeting Canada:
iShares MSCI Canada ETF (NYSE 🙂 – DY of 2.99%, YTD down 6.01%;
JPMorgan BetaBuilders Canada (NYSE 🙂 – DY of 2.63%, YTD down 6.42%;
SPDR® Solactive Canada ETF (NYSE 🙂 – DY of 2.99%, YTD down 6.01%.
We encourage potential asset investors to perform due diligence and analyze a particular financial product from various angles before hitting the "buy" button. It's important to look deeper than headline news and look for alternative assets that can also offer comparable exposure within a potentially better risk / return profile.
