The Best Preferred Stocks For 2021 (2024)

As Wall Street loses its mind over a long bond that pays a lousy 1%, we level-headed income investors are going to stay calm. And 7.7% on.

Yes, we “prefer” (hint, hint) dividends that are 7X the weak 1% yield the wonks are clamoring about. I’ll get to the specifics on these retirement makers—which we can buy as easily as common stocks—in a moment. First, let’s appreciate their dividend grandeur.

The Fed is content to sit on a near-zero benchmark rate until at least next year if not 2023. Compounding the problem is that yields on traditional blue chips, while always insufficient, are a downright mockery right now—the 1.55% current yield on the S&P 500 is its lowest point in 15 years.

But what if I told you that you could squeeze three, four, even five times more dividends out of the same exact S&P 500 stocks and other blue chips? (A yield that, again, is seven-fold better than the newly famous 10-year Treasury?)

Why I Prefer “Preferreds”

Let’s say we want to go out and buy shares of a company, say Bank of America (BAC) or Goldman Sachs (GS). When we do, these “BAC” and “GS” shares we acquire are known as “common stock.”

Chances are every individual share you’ve ever owned is from this common class. They provide a tiny sliver of ownership in the company, typically a vote in corporate elections, and any dividends declared on those shares.


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It’s not a bad deal, but in some instances, it’s not the only way you can invest in a company.

Some firms raise cash by issuing so-called preferred stocks. They’re called “preferreds” because their dividends get preferential treatment—a company must pay out preferred shareholders first, and it can’t suspend a preferred dividend without first doing the same to common shares.

But this dynamic doesn’t come into play very often. What matters more to investors is the nature of the stock.

Preferreds represent ownership in a company, but we typically don’t get voting rights. (Whatever—we’re here for the yield, not a corporate boardroom seat.)

Preferreds don’t appreciate as much as common shares—they act more like bonds, trading around a par value. It’s a smoother ride, like what we see out of Goldman and its Preferred D Series.

But this is just price performance, not total returns. The upshot to preferreds is they usually deliver far juicier dividends than their common-stock counterparts. Goldman’s D series only yield about 4.1% right now, but it’s typical for preferreds to yield in the 5%-7% range, and it’s far better than the 1.7% on GS commons.

Preferred stocks aren’t a total unknown. Investors have collectively put $19 billion into the index-based iShares Preferred and Income Securities ETF (PFF) for exposure, and billions more are spread out across a handful of other indexed products.

What’s less-known is that active managers of closed-end funds (CEFs) can wring even more returns out of this high-yield corner of the market. Rather than buying whatever the index says they must buy every quarter, active managers can avoid highly questionable preferreds while loading up on unfairly underloved issues.

And they can gin up returns even further through the use of leverage, which you’ll never see in your average preferred ETF.

So let’s take a peek into this under-covered area of the market and see which preferred funds you can trust for a high average yield of 7.7% (and some peace of mind).

John Hanco*ck Preferred Income Fund III (HPS)

Distribution Rate: 7.9%

Let’s start with the John Hanco*ck Preferred Income Fund III (HPS), which as the name implies is the third of three John Hanco*ck preferred-stock CEFs. It’s both the youngest—by virtue of its 2003 inception versus 2002 for the other pair—and the largest, with roughly $550 million in net assets.

The aim is simple: Management is looking to generate high income from a basket of preferred stocks, and typically at least half the portfolio is going to be investment-grade in nature.

Remember: One of CEFs’ greatest tools is the ability to use debt leverage to invest even more in management’s best ideas. And HPS doesn’t skimp here, levering nearly a third of assets to squeeze every last cent out of its portfolio.

It works.

That much leverage does contribute to volatility, so HPS isn’t for the faint of heart. Also, this CEF typically doesn’t present one opportunity its peers often do—to buy its assets for much cheaper than they’re worth. The fund currently trades at a modest 3.6% discount to NAV, and the most that has fallen to at any point over the past year is about 6%. Meanwhile, patient investors can often get quality CEFs at 90, 80 even 70 cents on the dollar if they pick their spots.

John Hanco*ck Premium Dividend Fund (PDT)

Distribution Rate: 8.6%

If you can stomach that amount of volatility out of a long-term holding, you can generate even more income through this next “hybrid” fund.

The John Hanco*ck Premium Dividend Fund (PDT) siphons income from commons and preferreds alike, and it does so across a tight portfolio of roughly 100 issues. The top 10 holdings, for instance, include both PPL Corp. (PPL) shares and a 5.9% preferred offerings from the very same firm. And again, it uses a healthy heap of leverage (36%) to amplify performance.

But maybe don’t jump right this minute. The CEF actually trades at a small 2% premium at present, just a few months after trading at a mouth-watering double-digit discount.

This chart clearly shows that PDT takes the occasional nap. I prefer to buy it then, during pullbacks (which can be quite sharp).

Cohen & Steers Limited Duration Preferred and Income Fund (LDP)

Distribution Rate: 6.7%

Back in September, I called out the Cohen & Steers Limited Duration Preferred and Income Fund (LDP) as a “noteworthy” preferred CEF—one whose makeup has played perfectly to the recent rise in interest rates.

A 4% difference might not seem like much, until you realize that’s just over the past four months, and in an asset class that’s not exactly known for being spry.

LDP is a “limited duration” fund in which the average duration of its portfolio is typically just six years or less. That helps cut down on interest-rate risk, which gives this preferred fund an advantage in a rising-rate environment. While the Fed doesn’t appear to be in a hurry to raise its benchmark anytime soon, additional stimulus and an eventual economic rebound could help push Treasury rates a little higher anyway.

Brett Owens is chief investment strategist forContrarian Outlook. For more great income ideas, get your free copy his latest special report:Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

Disclosure: none

As a seasoned investment enthusiast with a deep understanding of income-generating strategies, let's delve into the key concepts presented in the article. The author advocates for income investors to remain composed amidst the frenzy on Wall Street, emphasizing a preference for dividends over the seemingly meager yields of traditional investments. The focus is on preferred stocks and closed-end funds (CEFs) as viable alternatives to common stocks and bonds, providing a more substantial income stream.

  1. Preferred Stocks vs. Common Stocks:

    • Common stocks represent fractional ownership in a company, offering voting rights and a share of any declared dividends.
    • Preferred stocks, on the other hand, provide ownership without voting rights but enjoy preferential treatment in dividend payouts. A company must fulfill its obligations to preferred shareholders before common shareholders.
  2. Characteristics of Preferred Stocks:

    • Preferred stocks often exhibit price stability, behaving more like bonds and trading around a par value.
    • While they may not appreciate as much as common shares, preferred stocks typically yield higher dividends. The author cites an example of Goldman Sachs' Preferred D Series with a 4.1% yield compared to the 1.7% yield on common shares.
  3. Closed-End Funds (CEFs):

    • CEFs are investment funds with a fixed number of shares traded on the stock exchange. They can invest in a variety of assets, and their shares can trade at a premium or discount to their net asset value (NAV).
    • The author highlights the advantage of active management in CEFs, allowing fund managers to select preferred stocks strategically and avoid underperforming ones. Additionally, CEFs can employ leverage to enhance returns.
  4. Leverage in Closed-End Funds:

    • Leverage is utilized by CEFs to magnify returns, allowing them to invest more than their net assets. This strategy aims to maximize income generation.
    • The article emphasizes that leverage can contribute to volatility, making these investments more suitable for investors comfortable with some level of risk.
  5. Preferred Funds Recommendations:

    • The article introduces three preferred funds with attractive distribution rates:
      • John Hanco*ck Preferred Income Fund III (HPS) with a distribution rate of 7.9%.
      • John Hanco*ck Premium Dividend Fund (PDT) with a distribution rate of 8.6%.
      • Cohen & Steers Limited Duration Preferred and Income Fund (LDP) with a distribution rate of 6.7%.
  6. Considerations for Investors:

    • The author acknowledges the volatility associated with these preferred funds and suggests that investors should be mindful of market timing, potentially buying during pullbacks to enhance returns.
    • It is noted that the Cohen & Steers Limited Duration Preferred and Income Fund (LDP) is positioned as a "limited duration" fund, mitigating interest-rate risk.

In conclusion, the article promotes a nuanced approach to income investing, advocating for preferred stocks and CEFs as avenues to secure higher dividends in the current low-yield environment. The author provides specific fund recommendations while cautioning investors about associated risks and suggesting strategic entry points.

The Best Preferred Stocks For 2021 (2024)


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