In an economic environment where rising interest rates are the enduring trend, fixed income investors need yield in order to outpace the Federal Reserve. With the capital markets betting on another rate increase at the next Fed meeting, getting exposure to other income sources like preferred stock dividends can be of benefit.
Preferred stock exposure can afford more options to an investor than common stock, especially when it comes to liquidation of assets should a public company falter. Sans bond holders, preferred stock holders get paid first before common stock holders, giving them that level of priority.
There’s also some advantages with respect to their income-producing capabilities.
“Preferred stock looks much like a bond: It pays a contractual dividend, has a par value (or face value) can be redeemed early (often after five years) and may have a fixed maturity date,” Bankrate explained.
“Unlike bonds, preferred stocks may be able to skip their dividend payments, depending on the type (cumulative or non-cumulative) and some preferreds may not even have a maturity date, being perpetual,” Bankrate added. “Sometimes but not often, preferreds are convertible into common stock.”
Preferred Stock Exposure in 1 ETF
Getting preferred stock exposure is available in one exchange traded fund (ETF) for easy access: the Global X Variable Rate Preferred ETF (PFFV ). The fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the ICE U.S. Variable Rate Preferred Securities Index.
PFFV invests in a broad basket of U.S. variable-rate preferred stocks, providing benchmark-like exposure to the asset class. For fixed income investors, they’ll be happy to know that the fund has a 30-day SEC yield of 5.97% as of July 22 with a monthly distribution schedule.
Highlights of PFFV:
- High income potential: PFFV invests in a broad basket of variable-rate preferred stock in the U.S., an asset class that has historically offered high yield potential.
- Low expense ratio: PFFV’s expense ratio is half the competitor average.
- Lower duration nature: Variable-rate preferreds may offer lower duration profiles than fixed-rate preferred issuances.
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