One of the most secure and stable sources of generous returns in the market is going through a rare stormy moment. But these yields of 7% to 8% – For a monthly fee, no less! – Selling at discounted prices that we only see once every five years or so.
Is it time for us opponents to consider “backing up the truck” to load up on these monthly dividend machines?
Why “favorite” dividends are so cheap
“Preferred” stocks are hybrids of stock bonds, which rarely produce the prominent Wall Street coils. We love it that way, because these funds pay.
Even these unappreciated secrets usually suffer so much.
Rarely do you see preferences being so hurt
The reason preferences are usually so stable is that they simply charge income. We have no quarterly profit drama to worry about here.
Consider the start of the earnings season over the past few weeks. We have received reports like Wells Fargo & Co. (NYSE: WFC), JPMorgan Chase & Co. (Symbol: JPM) And other blue banks, and following these reports, the media is talking about how WFC went in that direction, and JPM went in that direction.
The stocks they refer to are the “common” stocks of the companies – typical stocks traded on the stock exchange that allow you to participate in the company’s profits while usually getting a vote on board elections and other issues.
But what the media often ignores – because there is rarely so much to talk about – is the preferred stocks of these and other companies. They are traded on stock exchanges just like regular stocks, but they have a few other features that make them act differently. For example, they are bond-like in that they are usually traded around a face value, and their “dividends” behave more like regular bond coupon payments.
They also have some pretty cool features of their own:
- “preference”: Usually, dividends in preference shares must be paid before dividends in ordinary shares. This gives you little protection against cutting or suspending your dividends when the company is going through financial difficulties.
- “Cumulative” dividends: If for any reason, a company misses a dividend payment on its preference shares, it must pay to preference shareholders the missed dividends before paying income to ordinary shareholders.
- Huge returns: Most preferred funds offer a return several times higher than the broad market at present. For example, JPMorgan has L-Series preferences that are currently yielding 5.8%. Wells Fargo has its own L Series preferences and 6.1% classes!
However, many others can yield a return of 7%, 8% and more – and in fact, this is the case with these three preferred funds that offer monthly payments and are currently traded at cheap valuations.
Nuveen Preferred & Income Opportunities Fund (NYSE: JPC)
Let’s start with the Nuveen Preferred & Income Opportunities Fund (NYSE: JPC).
This closed-end fund (CEF) invests in a portfolio of preference shares that is weighted at least 50% in an investment grade debt (this is at least BBB- for Fitch and S&P, and Baa3 for Moody’s). However, at the moment, the bag is even better quality, with just over 60% in the BBB range, and everything else except 2% in the highest range of junk (BB).
I mentioned above some bank preferences. This is because they are the most common type of favorites, and you can see it in JPC. Finance is one of JPC’s top five industries: diversified banks (28%), insurance (14%), regional banks (13%) and the capital market (10%). Meanwhile, JPM, Wells, Citigroup Inc. (Symbol: third) And Bank of America Corp. (NYSE: BAC) Are four of its major issuers (Walland O ‘Lakes finishes the top five).
Nuveen’s preferred fund also uses quite a bit of leverage – almost 40% in the last survey. It is published in three ways:
Greater returns, but also greater volatility
First, using debt leverage to actually “double” management’s best choices leads to a greater return on its monthly dividend than a regular basket of these base returns will provide. This has also led to better returns in the long run than a basic preferred ETF.
This comes at a price of higher volatility – which means, admittedly, sharper pulls in times of distress for preferences, like this rare tackle right now. But as a result, JPC trades at a discount of almost 9% to NAV, meaning you can buy its preferences at 91 cents on the dollar. This is a deeper discount compared to the five-year average of about 4%.
Cohen & Steers Limited Duration Preferred and Income Fund (NYSE: LDP)
Cohen & Steers Limited Duration Preferred and Income Fund (NYSE: LDP) It is quite unique in that as the name implies, it is a “for a limited time” fund. That is, the average period fund is usually six years or less – in theory, and helps reduce interest rate risk. Currently, its duration is only 3.1 years, which is about half a year less than the aforementioned JPC.
But in this case, management also went with a more aggressive portfolio from a credit quality standpoint. LDP has only 42% of its portfolio in investment grade preferences, with another 40% in higher quality BB issues. The rest are rated B or not rated at all. Cohen & Stirers also uses quite a bit of leverage (32%).
It has maintained a largely consistent performance with its recent competitor Nuveen.
That is, both funds were disappointed
But again, this has brought the monthly paying LDP to a 6% plus discount plump to a fund that in the last half decade has sold only 2% on average.
John Hancock Preferred Income II (NYSE: HPF)
John Hancock Preferred Income Fund II (NYSE: HPF)Another monthly payer, with a credit quality similar to that of the other two, but the nature of its basic holdings has given it a small advantage in the 2022 track.
HPF has an edge
HPF sits right in the middle of the three, in terms of credit, with just over half of its holdings in investment grade preferences, and the rest in BB. It also uses a high amount of leverage (35%).
However, John Hancock’s fund is different, is that it is more than just a preferred stock.
Yes, preferences are still in the spotlight, but at just over 60% of assets. However, about a third of its portfolio is invested in corporate debt. And HPF even holds little government debt, and ordinary U.S. and international stocks.
It helped a little to pad HPF so far this year, but even then, its declines brought it into crucial value territory. Normally, if you were going to buy John Hancock’s CEF sometime in the last five years, you would pay a NAV premium of about 2%. But right now, you can shoot it at a 2% discount.
So why do preferences get beaten up?
Preferred stocks also share one important feature with bonds – and it is this feature that is causing a lot of pain in the space right now.
They are sensitive to fluctuations in interest rates.
Think about it. Preferred stocks and bonds alike tend not to rise or fall much, meaning most of their value is tied to their yield. This is why rising interest rates tend to affect bond and preferred prices – because of the “coupon competition” they provide. Income investors are becoming impatient with their current holdings, which do not look relatively good. They are looking elsewhere, and this sale is lowering prices.
These 7%-8% Monthly Dividends Are on Sale! Source link These 7%-8% Monthly Dividends Are on Sale!