Preferred Stock ETFs Generate Robust Yields

Preferred stock exchange traded funds held up during the Cyprus brouhaha, but most investors are more interested in the investments’ ability to generate robust yields.

The iShares S&P US Preferred Stock Index Fund (NYSE: PFF), which comes with a 5.52% 30-day SEC yield, gained 0.20% over the past week, while the S&P 500 index remained unchanged.

A preferred stock is a blended security made up of leveraged companies. The stock has bond characteristics in that they pay a fixed income regularly and do not prosper from the earnings growth of the subject company. Preferred stocks trade on an exchange just like any other security.

On the securities pecking order, preferred stocks are senior to common stock but junior to corporate bonds, and shareholders have no voting rights.

“Preferred stock is a good diversifier, with low correlations to other income-generating asset classes like REITs, MLPs, corporate bonds, TIPs, and popular income ETFs,” according to Morningstar analyst Abby Woodham.

Nevertheless, Woodham warns that preferred stocks come with specific risks, such as their heavy exposure to financials, regulation changes and rising interest rates.

Moreover the tax treatment on the securities vary. Looking at PFF, Woodham notes that the “dividends preserve the tax treatment of the underlying securities’ dividends, which has resulted in its investors usually paying qualified rates on about 50% of dividends, ordinary income on the other half, and capital gains on sale of PFF.”

Source:  Tom Lydon, ETF Trends

PFF is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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