High-Yield Preferred Security Funds Offer Income Opportunities at Discount

Preferred securities, often overlooked in favor of common stocks or bonds, are gaining attention for their ability to provide high fixed dividends. Unlike common shares, preferreds typically lack voting rights but offer higher payout rates, often two to three times those of common equity, while trading around a par value. While exchange-traded funds (ETFs) provide broad exposure, actively managed closed-end funds (CEFs) are being highlighted for their potential to outperform through strategic selection and leverage. A key advantage of the CEF structure is the ability to trade at a discount to the fund's net asset value (NAV), allowing investors to purchase the underlying assets below their intrinsic value. The John Hancock Premium Dividend Fund (PDT) serves as a primary example, offering a 7.6% distribution rate. PDT employs a hybrid strategy, splitting assets between preferred securities—including holdings in Citigroup (C), Wells Fargo (WFC), and Citizens Financial (CFG)—and common dividend stocks such as Verizon (VZ). To enhance returns, PDT utilizes significant leverage, with debt currently standing at 34%. The fund is currently trading at an 11% discount to its NAV, meaning investors can effectively purchase assets for 89 cents on the dollar. Similarly, the Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund (PTA) offers a higher distribution rate of 8.3%, providing another avenue for income-focused portfolios.