For Preferred Income, This Active ETF is the Only Way to Go

Dividend Investing, ETFs, Preferred Shares

Recently I received a note from a long-time subscriber asking what was going on with the Dividend Hunter recommended preferred stock ETFs. During the Covid crash, these ETFs and preferred shares in general were a great buy.

With lower risk than regular shares, pre-fixed dividends, and fire-sale prices, those of my Dividend Hunter subscribers who followed me in buying preferred shares could have locked in a huge chunk of income.

So I did some digging and found significant differences in the year-to-date returns between the two highest profile picks. It goes to show that not all ETFs are the same…

Preferred stocks sit just above the common stocks in a corporation’s capital stack. This means preferreds have a higher claim than common shares on company assets but a lower claim than debt obligations, such as corporate bonds. Preferred stocks typically do not have a maturity date but do become callable. If called in, shareholders receive the par amount, usually $25.00 per share.

Preferred shares also have a preference over common shares for the payment of dividends. The company must pay the preferred dividends as long as it pays common stock dividends. As a result, preferred shares offer very secure, high-yield income potential.

I recommend using preferred stock investments as one type of high-yield investment for a balanced, income-focused investment portfolio.

Preferred shares have fixed dividends, so the share prices swing with changing interest rates, just as bond prices do. Rising rates will cause share prices to fall, which has been the case for the first half of 2022. I tell subscribers not to worry about the share prices. When investing in preferreds, the plan is to hold forever and earn a high yield. In most cases, shares will be held unless or until they get called in.

In the Dividend Hunter, I recommend investing in both individual preferred stocks as well as a high-quality preferred stock ETF.

The iShares Preferred and Income Securities ETF (PFF) is the largest and most popular preferred stock ETF. Passively managed, PFF tracks the investment result of an index of preferred and hybrid securities. The fund has 496 holdings, which covers almost every security in the category. PFF pays variable monthly dividends.

However, my own recommended ETF is the Virtus InfraCap U.S. Preferred Stock ETF (PFFA).

PFFA is actively managed by Infrastructure Capital Advisors, more commonly known as InfraCap. The managers focus on generating attractive yield and income from the fund. They avoid callable securities that would produce a negative yield to call. PFFA pays stable monthly dividends.

Let’s compare the year-to-date returns (as of 7/19/22):

The PFF share price has declined by 14.5%. Including dividends, the return is a negative 12.5%. PFF currently yields 4.8%.

For the same period, the PFFA share price declined by 13.5%, and the fund’s year-to-date total return was a negative 9.6%. PFFA currently yields 8.9%.

Remember that preferred share prices react to changing interest rates. Because of this fact, the PFF and PFFA share prices have very similar year-to-date results. At the same time, PFFA has paid dividends at almost double the yield of PFF.

The active management of PFFA makes it the clear winner.

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