A Last-Minute 7% Stocking Stuffer for the Income Investor

Shopping at the last minute?income investor
Allow me to offer a practical suggestion to relieve the anxiety.
How about a fund investment that offers low volatility, a 7.3% income yield, and income delivered in monthly installments? If an income investor is on the shopping list (including yourself), a more apropos gift would be difficult to conjure.
You might be tempted to wait. After all, higher interest rates are on the way, so higher interest payments are on the way. This is the narrative du jour to materialize after the recent passing of tax reform.
Interest rates have inched higher in recent weeks, no doubt. The yield on the 10-year U.S. Treasury note — a bellwether security for long-term interest rates — is up to 2.5%. This is the highest the yield has been since March.
But will it hold?
I wouldn’t hold my breath.
We’ve experienced numerous false starts in the past. The yield on the 10-year note spiked to 3% in late 2013 on rumblings Federal Reserve officials would raise interest rates. A year later, the yield drooped below 2%. The yield rose in late 2015 on the Fed’s first interest-rate increase. The yield sunk shortly after. We’ve seen numerous false starts since.

The Fed and Interest Rates

Given the dearth of consumer-price inflation, as offered by the Fed’s house economists, and what I see as irrational exuberance on growth expectations, I expect interest rates to remain subdued.
A low-volatility government investment that yields above 5% still resides in the distant future.
The good news is that I offer an income alternative this holiday season. I offer the income investor a quality investment that yields 7.3%. What’s more, this investment is stable with low volatility. It also pays its income in monthly installments.
I refer to Nuveen Preferred Securities Income Fund (NYSE: JPS), a fund of quality preferred stocks that yields 7.3%.
Nuveen owns over 190 individual preferred stocks, so it offers instant diversification. As any financial theorist will tell you, diversification lowers risk.
Preferred stocks possess characteristics that naturally appeal to risk-averse income investors. Preferred stocks are safer than common stock because they have a higher claim on the company’s assets. In some instances, they are nearly as safe as bonds.
Preferred stocks are really hybrid securities. They have characteristics of both stocks and bonds.
Preferred stocks are like common stock, in that dividends are paid and the shares trade on the major exchanges. Preferred stocks are like bonds; they are issued with a coupon payment based on par value. The dividend a preferred stock pays is contractual.
Like bonds, most preferred stocks are rated by Moody’s and Standard & Poor’s. Many investors can use preferred stocks as a fixed-income addition to their investment portfolio.

Perfect for the Income Investor

Nuveen employs a yield-enhancing strategy that would be cost prohibitive for most investors. Nuveen uses leverage. In fact, 29% of the Nuveen fund is leveraged with borrowed funds.
Nuveen has an advantage, though. It borrows at a favorable rate. Its annualized borrowing cost is a mere 2%. Given the reluctance of interest rates to move materially higher, I don’t expect Nuveen’s borrowing cost to rise in the near future.
I mentioned the frequency of payments. Unlike most individual preferred stocks, the Nuveen fund pays dividends monthly, not quarterly.
A higher-yield dividend delivered in monthly installments is a welcomed benefit this time. The bills arrive monthly. Following the post-holiday hangover, the amounts embedded in those will be substantially higher next month for many of us.
Yes, I realize that a gift of Nuveen Preferred Securities Income Fund shares is a practical gift for the income investor, much like underwear or galoshes. But unlike underwear or galoshes, a gift of Nuveen fund shares would be a gift that keeps giving.

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