Time to consider preferred stocks; or for individual investors, preferred-stock funds. At least that was the thesis I forwarded in Wednesday’s Income & Prosperity. I stick to my guns.
For income investors considering preferred stocks, having an idea of what to consider is a rational starting point.
I have three preferred-stock funds worth considering today. All three funds yield above 6%, and all three pay dividends monthly. This is an addditional benefit for anyone dependent on investment income to meet monthly expenses.
First up, iShares U.S. Preferred Stock ETF (NYSE: PFF). iShares holds over 300 preferred stocks, heavily weighted toward preferreds issued by financial, insurance, and real estate companies. This isn’t terribly unusual, or should be of any particular concern; these industries are the lead preferred-stock issuers.
The iShares fund is one of the more established preferred ETFs, existing since mid-2007. iShares provides a 6.5% on its monthly dividends (based on trailing 12 months of distributions). The downside is that the distributions are variable. Over the past 12 months, dividends have ranged between $0.15 to $0.24 per share. (There was a $0.61-per-share dividend in December, but this was an outlier.)
For investors willing to venture out on the risk curve, and thus capture a little more yield, the Global X Super Income Preferred ETF (NYSE: SPFF) is worth considering. The fund invests in 45 different holdings issued by companies in the United States, Canada, and Western Europe.
Like iShares, the Global X fund has a heavy weighting of financial issues. The difference is the weighting is geographically diverse. With fewer holdings spread over a wider terrain, Global X generates a 7.1% yield (again, based on trailing 12 months of distributions).
Global X’s monthly distributions are also variable, though there hasn’t been much variability over the past 12 months. Global X’s dividends tend to vibrate between $0.08 and $0.09 a month (with a $0.14 outlier that occurred in December). Global X doesn’t have long track record – it’s been around for roughly two years – but it’s a worthwhile investment for income investors with a slightly higher risk tolerance.
But is there a preferred-stock option for income investors seeking a consistent monthly income?
Glad you asked, because there is. Nuveen Quality Preferred Income Fund II (NYSE: JPS) is a closed-end fund that pays dividends monthly at the rate of $0.055 a share. Nuveen has paid this dividend at this rate for the past five years. A monthly per-share $0.055 distribution might be the lowest distribution in absolute terms, but relative to its share price, it produces the highest yield at 7.4%.
Note, though, that Nuveen isn’t an ETF, it’s a closed-end fund. It operates differently. For one, Nuveen’s net asset value (NAV) won’t adhere as closely to the market price as an ETF. Indeed, Nuveen shares actually trade at a 9.7% discount to NAV. (Buying at a discount is a positive.) Like iShares, Nuveen manages a diversified portfolio – 227 issues – that’s weighted toward financial, insurance, and real estate. But unlike iShares and Global X, Nuveen uses low-cost leverage – 28% of the fund – to goose income.
Nuveen yields nearly a full percentage point more than iShares and it pays steady monthly income. To be sure, the income is encumbered with slightly more risk: leverage always increases financial risk. But with the Nuveen fund, the reward is commensurate with the risk.
For any income investor who wants to venture into the world of high-yield preferred stock funds, any of these three picks will competently do the job.
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