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Summary Closed-end funds provide a great way to invest in preferred securities. FFC and PDT have beaten the S&P 500 over the past 10 years. The Preferred CEFs outperformed the lower cost ETF iShares US Preferred Stock Fund. Traditional preferred stocks provide a fixed dividend payment and generally do not mature but can be called on or after a specified call date. Some preferred stocks can adjust to floating rates (LIBOR plus a given percentage). It is possible to invest in individual preferred stock or select a fund that invests in preferred stocks. I invest in both individual preferred stocks and closed-end funds that focus on preferred stocks. The CEF approach will be more volatile but can provide diversification and higher income due to the leverage. iShares US Preferred Stock Fund (NYSEARCA: PFF ) provides a lower cost ETF alternative but it has lagged behind its closed-end fund cousins in performance. Over the last 5 years, the S&P 500 has outperformed my preferred closed-end funds, but if you look at the past 10 years, the picture looks quite different. Assuming that the stock prices are a bit toppy, the next 5 years maybe favorable for collecting the nice income from preferred stocks without missing out on a super-hot stock market appreciation. Fund 5 yr Month End average annual return 10 yr Month End average annual return John Hancock Premium Dividend Fund (NYSE: PDT ) 11.86% 10.87% Flaherty and Crumrine Preferred Securities Income Fund (NYSE: FFC ) 13.56% 10.49% SPDR S&P 500 (NYSEARCA: SPY ) 14.29% 7.40% iShares US Preferred Stock 6.49% n/a Below is the investment objective summary for the three preferred stock closed-end funds from Fidelity: John Hancock Premium Dividend Fund: The fund will invest in common stocks of issuers whose senior debt is rated investment grade or, in the case of issuers that have no rated senior debt is considered by the Adviser to be comparable quality. 80% of funds total assets consist of preferred stocks and debt obligations rated A or higher. Leverage ratio 34.1% Flaherty & Crumrine Preferred Securities Income Fund Inc: The fund invests normally at least 80% of its total assets in preferred securities that are mainly hybrid or taxable preferred securities. At least 80% of the preferred securities are investment grade quality. Up to 20% may be invested in securities rated below investment grade. It may also invest up to 20% of its assets in other debt securities and up to 15% in common stocks. Leverage ratio 34.65% First Trust Intermediate Duration Preferred and Income Fund (NYSE: FPF ): Under normal market conditions, the Fund will invest at least 80% of its Managed Assets in a portfolio of preferred and other income-producing securities issued by U.S. and non-U.S. companies, including traditional preferred securities, hybrid preferred securities that have investment and economic characteristics of both preferred securities and debt securities, floating rate and fixed-to-floating rate preferred securities, debt securities, convertible securities and contingent convertible securities. All three funds pay monthly distributions, have a positive NAV return, and a positive UNII Symbol 3 yr return on NAV 12 month return on NAV Distribution (Market) Discount Discount 52 wk average UNII Expense Ratio adjusted PDT 9.81% 3.42% 8.31% -9.95% -10.28% $0.0046 1.44% FFC 8.26% 3.13% 8.06% 8.35% 2.04% $0.0208 0.88% FPF n/a 6.00% 9.19% -9.32% -8.08% $0.1029 1.33% Year to Date, FPF’s NAV performance was quite a bit better than the S&P 500: Symbol YTD Price perf NAV perf PDT 5.25 2.86 FFC 14.21 3.95 FPF 2.41 6.21 SPY 3.02 2.95 Obviously, for long term investors a single year is not that meaningful. The table below shows the 5 yr and 10 yr returns of PDT and FFC compared to the S&P 500 index fund and the ETF preferred PFF. FPF does not have that much historic data available yet. Fund 5 yr Month End average annual return 10 yr Month End average annual return John Hancock Premium Dividend Fund 11.86% 10.87% Flaherty and Crumrine Preferred Securities Income Fund 13.56% 10.49% SPDR S&P 500 14.29% 7.40% iShares US Preferred Stock ( PFF ) 6.49% n/a Risks With Preferred Stock investments: Any investment carries risk and preferred stocks are interest rate sensitive. Preferred stocks are not appropriate if you believe that the rate increases by the Federal Reserve will continue or accelerate. Conclusion: The three preferred closed-end funds shown in this article may be a good addition to a diversified portfolio under the assumption that the interest rates will not rise drastically. They will not outperform the stock market in a bull market scenario but if the market drops or stays range-bound, the consistent income from the closed-end funds can then be channeled into other stock purchases or dividend reinvestments. FPF’s current discount is attractive. When looking at the 3 yr average discount, I would want to buy PDT at or below 13.44 and FFC at or below 18.97. FFC definitely has the best expense ratio of the three. Scalper1 News
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