As investors near retirement, they tend to favor bonds, which provide income and less drama than stocks. However, less drama means less potential upside. With retirees living longer than ever before—which means much more time for inflation to eat away at your nest egg’s purchasing power—it’s important to not go too conservative too early in life. And fortunately, today even 65 or 70 may be too early!
One suggested solution for our long life expectancy “problem” is to stay with stocks longer. But stocks can go down as well as up, and a big pullback can inflict permanent damage on a portfolio.
So we want to capture the dividends that stocks pay and the upside potential that they provide by minimizing our downside risk. We can do this by focusing on hybrid stock/bond vehicles that are designed to extract payouts and provide downside buffers. Let’s focus on an underappreciated way to double your dividends from stocks that you may already own: preferred shares.
Not familiar with preferred shares? You’re not alone—most investors only consider “common” shares of stock when they look for income. You probably know the problem with this approach. Common stock in S&P 500 companies pays just 1.9% today, on average. But you can double your yields or better and actually reduce your risk by trading in your common shares for preferreds.
A company will issue preferred shares to raise capital, just as it offers bonds. In return it will pay regular dividends on these shares and, as the name suggests, preferred shareholders receive their payouts before common shares.
They typically get paid more, and even have a priority claim over common stock on the company’s earnings and assets in case something bad happens, like bankruptcy. They are “preferred” over common stock, and after secured debt, in the bankruptcy pecking order.
So far, so good. The tradeoff? Less upside. But in today’s expensive stock market—still pricey even after the late 2018 correction—that may not be a bad substitution to make. Let’s walk through a sample common-for-preferred exchange that would nearly double your current dividends with a simple trade-in.
As I write, the common shares from JPMorgan (JPM) pay 2.8%. But the firm recently issued Series DD preferreds paying 5.75%. JPMorgan shareholders looking for more income may be happy to make this tradeoff.
Meanwhile, Bank of America (BAC) common pays 2% today. But B of A just issued some preferreds that pay a fat 5.88%. That’s a 194% potential income raise for shareholders who want to trade in their garden-variety shares. But how exactly do we buy these as individual investors? Which series are we looking for again?
A big problem with preferred shares is that they are complicated to purchase without the help of a human broker. So, many investors attempt to streamline their online buys and simply purchase ETFs (exchange-traded funds) that specialize in preferreds, such as the Invesco Preferred ETF (PGX) and the iShares S&P Preferred Stock Index Fund (PFF).
After all, these funds pay up to 5.9% and, in theory, they diversify your credit risk. Unfortunately, many ETF buyers have little understanding of preferred shares—let alone how a particular fund invests in them. Should we entrust the selection of preferred shares to a mere formula baked into an ETF?
No! The problem with the ETF model is that it doesn’t account for credit risk as accurately as an expert human can. Which means a better idea is—you guessed it!—to find an active manager to handpick your preferred your portfolio. Buying a discounted closed-end fund (CEF) is the best way to do this. Here are three preferred CEFs that have all outperformed their more popular ETF cousins over the past five years.
The Top Three Are CEFs, Bottom Two Are ETFs
You’ll rarely get a deal buying an ETF. They don’t trade at discounts because their sponsors simply issue more shares to capitalize on any increased demand. We CEF investors don’t have this popularity problem; we can get a deal. We simply wait and only purchase CEFs when they trade at a discount to their net asset values (or the sum of the market prices of the preferred shares they own minus any leverage).
The preferred ETFs, Invesco Preferred and iShares US Preferred, trade at their “par” value, which means we’re paying $1 for $1 in preferred shares. Meanwhile, Nuveen Preferred & Income Securities Fund (JPS), a CEF, yields more (7.3%) and trades for just 96 cents on the dollar! Plus, it has the benefit of an active manager, which is why the fund regularly outperforms its ETF counterparts
Better Yields, Deals, and Returns with CEFs
When we’re shopping in the preferred aisle, it’s a “no brainer” to go with the CEF concierge service. They yield more, they appreciate in price more, and best of all, the money manager is free when we buy at a discount.
8 Screaming Buys for 8% Yields and “Crash Insurance”
JPS, HPS and FPF are powerful examples of what it means to have a whip-smart team at the helm—especially when you venture a little outside the S&P 500 stocks most folks limit themselves to.
And the value these experts bring doubles in a market collapse, because shrewd managers can make quick moves to keep your cash safe while you skate through, pocketing those mighty 7%+ dividends.
But as attractive as they are now, we can do even better, dialing our yield all the way up to a square 8.0%!
It’s all thanks to 4 other CEFs—including a preferred-stock CEF—that all hold pride of place in my “8% No-Withdrawal Retirement Portfolio.”
These 4 funds all trade at much wider discounts than these preferred funds—I’m talking markdowns all the way up to 8.9%. That’s an insult to their savvy management teams—but it sets us up for massive upside while we collect these 4 funds’ 8%+ dividends!
When you add these 4 CEFs to the 4 other high-yield investments in my “8% No-Withdrawal Retirement Portfolio,” you get a rock-solid 8.0% average yield—enough to let many folks live on dividends alone, without having to sell a single stock in retirement!
Most investors know this is the right approach to retirement. Problem is, they don’t know how to find 8% yields to fund their lives.
That’s why I specialize in finding safe, under-the-radar high-income options like these.
Click here and I’ll give you the full tour of this portfolio and reveal the names, tickers and buy prices of the 8 proven income plays inside—including my 4 favorite CEFs—now.