Co-authored with “Hidden Opportunities”

Feeling like a VIP can turn the mundane into something marvelous. From priority boarding on an airplane to a room with a view at a hotel, these little luxuries make everyday moments extra special. In the world of investments, preferred securities offer similar “priority” perks to shareholders.

• Dividend preference: Preferreds hold a unique “preference” or priority over common shareholders, with the first claim on the company’s profits.

• Priority in liquidation: In the event of a company’s liquidation, preferred shareholders are entitled to receive their capital back before common shareholders.

Preferred stocks provide a predictable income stream through calculable fixed or floating-rate dividends, making them attractive for income investors. However, they are relatively lesser known among individual investors, with fears of unfair treatment or issuer malpractice. Despite these concerns, the default rate on U.S. preferreds in the past 30 years is only 0.3%.

Moreover, the power of diversification cannot be underestimated. A diversified portfolio of preferred securities improves income safety and stability against any instances of weak execution or deals made in bad faith.

Two diversified funds focused on preferred securities stand out: let’s dive in!

Virtus InfraCap U.S. Preferred Stock ETF (PFFA) – Yield 9.6%

Virtus InfraCap U.S. Preferred Stock ETF (PFFA) behaves much like a Closed-End Fund (CEF), with its 20-30% operating leverage, active portfolio management, and large yield. PFFA’s top positions in utility and REIT-preferred industries can potentially benefit from inflationary pressures and interest rate cuts.

PFFA recently raised its monthly distribution, reflecting a 9.6% yield, and is well-positioned to deleverage naturally without squeezing shareholder returns.

Cohen & Steers REIT and Preferred and Income Fund (RNP) – Yield 8%

Cohen & Steers REIT and Preferred and Income Fund (RNP) is a highly diversified CEF with 292 holdings. RNP is a hybrid of deeply discounted, income-focused sectors, namely equity REITs and non-REIT preferred stock, at a 48%/52% mix.

RNP operates with a ~31% leverage, ensuring it can ride out rate cycles and refinance on better terms. It offers an 8% annualized yield and trades almost at par with NAV.

Conclusion

Financial markets are complex and can be influenced by both decisive leaders and those with varying intentions. As individual investors, safeguarding our financial assets from misaligned goals or surrounding headwinds is crucial. Diversification is our powerful ally in this pursuit.

Located higher in the capital structure of the issuing company, preferred securities present stability and income safety, making them a must-have for income investors and retirees. Diversification into this income-oriented asset class protects your portfolio from unnecessary surprises, and funds like PFFA and RNP offer this safety and big monthly distributions for a stress-free retirement.