How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

Closeup of blue poker chip on red felt card table surface with spot light on chip

Preferred stocks are the little-known answer to the dividend question: How do I juice meaningful 5% to 6% yields from my favorite blue-chip stocks? “Common” blue chips stocks usually don’t pay 5% to 6%. Heck, the S&P 500’s current yield, at just 1.3%, is its lowest in decades.

But we can consider the exact same 505 companies in the popular index—names like JPMorgan Chase (JPM), Broadcom (AVGO) and NextEra Energy (NEE)—and find yields from 4.2% to 6.9%. If we’re talking about a million dollar retirement portfolio, this is the difference between $13,000 in annual dividend income and $42,000. Or, better yet, $69,000 per year with my top recommendation.

Most investors don’t know about this easy-to-find “dividend loophole” because most only buy “common” stock. Type AVGO into your brokerage account, and the quote that your machine spits back will be the common variety.

But many companies have another class of shares. This “preferred payout tier” delivers dividends that are far more generous.

Companies sometimes issue preferred stock rather than issuing bonds to raise cash. And these preferred dividends have a few benefits:

  • They receive priority over dividends paid on common shares.
  • Sometimes, preferred dividends are “cumulative”—if any dividends are missed, those dividends still have to be paid out before dividends can be paid to any other shareholders.
  • They’re typically far juicier than the modest dividends paid out on common stock. A company whose commons yield 1% or 2% might still distribute 5% to 7% to preferred shareholders.

But it’s not all gravy.

You’ll sometimes hear investors call preferreds “hybrid” securities. That’s because they act like a part-stock, part-bond holding. The way they resemble bonds is how they trade around a par value over time, so while preferreds can deliver price upside, they don’t tend to deliver much.

No, the point of preferreds is income and safety.

Now, we could go out and buy individual preferreds, but there’s precious little research out there allowing us to make a truly informed decision about any one company’s preferreds. Instead, we’re usually going to be better off buying preferred funds.

But which preferred funds make the cut? Let’s look at some of the most popular options, delivering anywhere between 4.2% to 6.9% at the moment.

Wall Street’s Two Largest Preferred ETFs

I want to start with the iShares Preferred and Income Securities (PFF, 4.2% yield) and Invesco Preferred ETF (PGX, 4.5%). These are the two largest preferred-stock ETFs on the market, collectively accounting for some $27 billion in funds under management.

On the surface, they’re pretty similar in nature. Both invest in a few hundred preferred stocks. Both have a majority of their holdings in the financial sector (PFF 60%, PGX 67%). Both offer affordable fees given their specialty (PFF 0.46%, PGX 0.52%).

There are a few notable differences, however. PGX has a better credit profile, with 54% of its preferreds in BBB-rated (investment-grade debt) and another 38% in BB, the highest level of “junk.” PFF has just 48% in BBB-graded preferreds and 22% in BBs; nearly a quarter of its portfolio isn’t rated.

Also, the Invesco fund spreads around its non-financial allocation to more sectors: utilities, real estate, communication services, consumer discretionary, energy, industrials and materials. Meanwhile, iShares’ PFF only boasts industrial and utility preferreds in addition to its massive financial-sector base.

PGX might have the edge on PFF, but both funds are limited by their plain-vanilla, indexed nature. That’s why, when it comes to preferreds, I typically look to closed-end funds.

Closed-End Preferred Funds

CEFs offer a few perks that allow us to make the most out of this asset class.

For one, most preferred ETFs are indexed, but all preferred CEFs are actively managed. That’s a big advantage in preferred stocks, where skilled pickers can take advantage of deep values and quick changes in the preferred markets, while index funds must simply wait until their next rebalancing to jump in.

Closed-end funds also allow for the use of debt to amplify their investments, both in yield and performance. Should the manager want, CEFs can also use options or other tools to further juice returns.

And they often pay out their fatter dividends every month!

Take John Hancock Preferred Income Fund II (HPF, 6.9% yield), for example. It’s a tighter portfolio than PFF or PGX, at just under 120 holdings from the likes of CenterPoint Energy (CNP), U.S. Cellular (USM) and Wells Fargo (WFC).

Manager discretion means a lot here. That is, HPF doesn’t just invest in preferreds, which are 70% of assets. It also has 22% invested in corporate bonds, another 4% or so in common stock, and trace holdings of foreign stock, U.S. government agency debt and cash. And it has a whopping 32% debt leverage ratio that really helps prop up the yield and provide better returns (though at the cost of a bumpier ride).

You have a similar situation with Flaherty & Crumrine Preferred and Income Securities Fund (FFC, 6.7%).

Here, you’re wading deep into the financial sector at nearly 80% exposure, with decent-sized holdings in utilities (7%) and energy (7%). Credit quality is roughly in between PFF and PGX, with 44% BBB, 37% BB and 19% unrated.

Nonetheless, smart management selection (and a healthy 31% in debt leverage) has led to far better, albeit noisier, returns than its indexed competitors. The Cohen & Steers Select Preferred and Income Fund (PSF, 6.0%) is about as pure a play as you could want in preferreds.

And it’s also a pure performer.

PSF is 100% invested in preferred stock (well, more like 128% if you count debt leverage), and actually breaks out its preferreds into institutionals that trade over-the-counter (83%), retail preferreds that trade on an exchange (16%) and floating-rate preferreds that trade OTC or on exchanges (1%).

Like any other preferred fund, you’re heavily invested in the financial sector at nearly 73%. But you do get geographic diversification, as only a little more than half of PSF’s assets are invested in the U.S. Other well-represented countries include the U.K. (13%), Canada (7%) and France (6%).

What’s not to love?

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

I graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today they serve more than 26,000 business users combined. I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset.

Source: How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

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Critics:

A blue chip is stock in a stock corporation (contrasted with non-stock one) with a national reputation for quality, reliability, and the ability to operate profitably in good and bad times. As befits the sometimes high-risk nature of stock picking, the term “blue chip” derives from poker. The simplest sets of poker chips include white, red, and blue chips, with tradition dictating that the blues are highest in value. If a white chip is worth $1, a red is usually worth $5, and a blue $25.

In 19th-century United States, there was enough of a tradition of using blue chips for higher values that “blue chip” in noun and adjective senses signaling high-value chips and high-value property are attested since 1873 and 1894, respectively. This established connotation was first extended to the sense of a blue-chip stock in the 1920s. According to Dow Jones company folklore, this sense extension was coined by Oliver Gingold (an early employee of the company that would become Dow Jones) sometime in the 1920s, when Gingold was standing by the stock ticker at the brokerage firm that later became Merrill Lynch.

Noticing several trades at $200 or $250 a share or more, he said to Lucien Hooper of stock brokerage W.E. Hutton & Co. that he intended to return to the office to “write about these blue-chip stocks”. It has been in use ever since, originally in reference to high-priced stocks, more commonly used today to refer to high-quality stocks.

References:

New WiFi 6E Standard Brings 5G-Related Technologies To Local Area Wireless

When people talk about wireless technologies, they tend to think about broadband cellular wireless networks like 5G and WiFi, which offers local area wireless connections. The truth is that most people do not really know (nor do they care) much about the differences between how each technology works. They just want to know if they have reception that allows them to connect to a network and that they can get to the information, content, or services that they want.

If you are the type of person who’s reading a column like this, however, you probably do have at least a passing interest in how the technologies powering these different types of networks are related. Those questions are particularly relevant now, thanks to the latest additions to the WiFi standard, WiFi6 and WiFi6E. Several of the underlying technologies powering these new networks are very similar to, or in some cases even the same as, ones used for 5G networks.

Signal modulation techniques like OFDMA (Orthogonal Frequency-Division Multiple Access) and transmission technologies like beamforming and MU-MIMO (Multi-User Multiple Input, Multiple Output), for example, are a key part of both WiFi 6/6E and 5G.

But first, a quick reminder. Like all cellular technologies, 5G is based on the use of licensed radio frequency spectrum (for more details on what spectrum is and how it works, see “The 5G Landscape, Part 2: Spectrum and Devices.”) What this means is that companies that want to use these networks—that is, telco carriers—have to purchase the exclusive right to broadcast signals over certain radio frequencies.

Those signals are broadcast from cell towers at high power levels and can travel for long distances, often measured in miles. In order to connect to those networks, any device you use needs to have a SIM card (or eSIM) that confirms you have a valid account on a particular cellular network, and you have to pay to get access to that network.

Today In: 5G
  • Microsoft’s New Azure Edge Zones Highlights Opportunity To Combine 5G And Edge Computing

  • Samsung Breaks $500 Barrier For 5G Smartphones With New A Series

  • Microsoft Purchase Of Affirmed Networks Highlights 5G Focus Shifting To Infrastructure

All WiFi networks, on the other hand, use what’s called unlicensed or shared spectrum, meaning anyone has the right to create products that broadcast and receive signals on those frequencies. In addition, access to these networks (in most cases) is free, and devices don’t require anything like a SIM card to connect to them, just a radio capable of sending and receiving signals at certain frequencies.

For WiFi, the frequencies that are used are 2.4 GHz and 5 GHz. Importantly, these frequencies are available for use globally, meaning you can use the same WiFi device and chips that power a WiFi connection anywhere in the world. Finally, the signals on WiFi networks are sent at lower power rates, which means they don’t travel as far—typically within the walls of your house, a section of your office, etc.

For a long time, the technologies behind cellular networks and WiFi networks were fairly different. Over the last few years, however, as the latest generations of these technologies were developed, there has been a great deal of technology crossover between them. The reason? Some of the same challenges facing WiFi networks have also been issues in cellular networks.

Specifically, both of these network types have been facing problems with congestion, where more devices and faster connection are creating digital “traffic jams” that end up slowing down network response for everyone. As a result, both new WiFi networks have integrated similar capabilities and core technologies that are designed to battle these and other concerns, such as reducing latency or lag time.

To be perfectly clear, these similar technology additions do not mean that the two network types are merging (at least for now): they are and will continue to be fundamentally different animals because of the technology and business model differences described above. They are similar, however, in that you need to have new devices and new network equipment (or new routers in the case of WiFi) in order to take advantage of these networks.

In other words, you only get the benefits of 5G if you have a 5G-capable smartphone or other device connecting to a 5G network and the benefits of WiFi 6 (also sometimes referred to as 802.11ax) if you have a WiFi 6-enabled device connecting to a WiFi 6-certified router. Thankfully, many newer devices, such as Samsung’s Galaxy S20 phones and more, support both new network types in a single device.

The WiFi6 standard was officially ratified in September of 2019, and chips that support the standard from companies like Qualcomm, Intel, Broadcom, Marvell, MediaTek and others have been shipping for over a year. In addition to OFDMA, MU-MIMO and beamforming, some other key technology additions to WiFi6 include Target Wake Time, which can improve battery performance in mobile devices by signaling when radios can be turned on and off, support for wider frequency channels of transmission, and something called spatial frequency reuse, which lets more devices peacefully co-exist on different channels on the same network or across neighboring networks.

The other interesting new connection between WiFi 6, or more specifically, WiFi 6E, and 5G is the availability of new spectrum, or open airwaves, that can be used to transmit more data on each of these networks. In the case of WiFi 6, just last week the US Federal Communications Commission (FCC) approved the addition of a huge 1.2 GHz (1,200 MHz) wide band of spectrum for unlicensed WiFi use in the US—the first addition of new frequencies for WiFi in over 20 years. (As a point of reference, the unlicensed frequencies available for WiFi at 2.4 GHz are only 70 MHz wide, while there is 500 MHz available at 5 GHz.)

Specifically, the FCC enabled the use of frequencies from 5.9 to 7.1 GHz for unlicensed WiFi use, and devices that can support those new frequencies can be labelled with the brand new WiFi 6E standard (a name created by the WiFi Alliance industry consortium). The catch is that, right now, those frequencies are only available as unlicensed spectrum in the US, and it could take (although hopefully won’t) several years for other countries to make the same move.

Thankfully, the US is a large enough and influential enough market that chip makers have already started to produce the components that include support for 6E, but don’t count on WiFi 6E being a global standard for some time. Still, we should start to see WiFi 6E-capable routers and other devices here in the US by the end of this year.

The full story on WiFi 6E naming needs a bit of additional clarification. Despite the 6 in the name, “normal” WiFi 6 devices cannot connect to or take advantage of the new 6GHz frequencies. Only WiFi 6E devices can use those new frequencies. The good news is, new 6E-capable devices and routers will likely use that new set of frequencies exclusively, freeing up the older, lower frequency bands to be used solely by older devices.

That doesn’t really matter right now, of course, but eventually that will make a big difference in improving overall WiFi speeds, reducing WiFi network congestion and reducing network response time (i.e., improvements in latency). WiFi mesh routing systems, in particular, are likely to be the earliest benefactors of the new 6 GHz spectrum. Both WiFi 6 and WiFi 6E devices and routers can take advantage of all the new technologies described above.

The key difference is that WiFi 6E-equipped components can use them both on existing 2.4 and 5 GHz frequencies as well as the new 6 GHz frequencies, whereas “normal” WiFi 6 devices can only use those technologies at the older 2.4 and 5 GHz bands.

Despite all the improvements and potential around 6 GHz frequency spectrum, it is important to point out that signals sent at those frequencies are subject to the same physical laws as any other radio frequency transmissions. Specifically, the higher the frequency, the less distance a given signal travels at the same power transmission levels, and the more difficulty it has in passing through thick objects like cement walls.

Practically speaking, that means 2.4 GHz WiFi signals can travel the furthest, but the ability to use channels up to 160 MHz wide (which is one of the benefits of WiFi 6) and the addition of up to 7 different 160 MHz channels, or 14 new 80 MHz channels (which is what the new 6 GHz frequencies enabled by WiFi 6E bring to the table), should still translate to significantly faster real-world performance with 6GHz WiFi 6E.

In fact, the performance improvements with WiFi 6E could be so good in some situations—think large public venues like sports stadiums, concert halls, and potentially even some corporate campuses—some people believe it could be a competitive threat to 5G. Of course, conversely, there are some who would argue that the growing potential interest in creating private 5G networks could supersede the need for WiFi 6 or 6E. For 5G, the argument is primarily around security, because the need to have a SIM-authorized device to connect to a cellular network is inherently more secure than WiFi networks’ more open approach.

Of course, there are security standards for WiFi as well, so the argument isn’t really quite that simple. Another potentially interesting future dilemma is that there has been some work and discussion around using the newly released unlicensed 6 GHz spectrum as extensions to 5G networks, but nothing definitive has come to pass. Regardless, it’s clear that in some situations or certain physical environments, we could start to see 5G and WiFi 6E as more competitive technologies than the two have ever been.

Ultimately, however, because of the huge legacy base of both WiFi and cellular-enabled devices, the much more likely outcome is that both types of networks will exist for some time to come. Eventually, because of the increasing similarity of the underlying technologies, we could even start to see them come closer together, but there are a huge number of business model-related issues that would have to be figured out first. In the meantime, thanks to some surprisingly quick additions to the frequency spectrums of both 5G (see “CBRS Vs. C-Band: Making Sense Of Mid-Band 5G” and “Spectrum-Sharing Technologies Like CBRS Key To More Robust Wireless Networks” for more) and WiFi here in the US, the good news is that we’re about to have a faster, broader, and more robust set of connectivity options here than we’ve ever seen before.

Disclosure: TECHnalysis Research is a tech industry market research and consulting firm and, like all companies in that field, works with many technology vendors as clients, some of whom may be listed in this article.

Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.

Bob O’Donnell is the president, founder and chief analyst at TECHnalysis Research, a technology market research and consulting firm that counts many of tech industry’s largest vendors among its clients. The firm’s research and O’Donnell’s opinions are also regularly used by major media outlets, including Bloomberg TV, CNBC, CNN, Investor’s Business Daily, the Wall Street Journal, Yahoo Finance, and more. O’Donnell writes regular columns for USAToday and Forbes, as well as a weekly blog for Tech.pinions.com that’s also published on TechSpot, SeekingAlpha and LinkedIn. Prior to founding TECHnalysis Research, O’Donnell served as Program Vice President, Clients and Displays for industry research firm IDC. O’Donnell is a graduate of the University of Notre Dame

Source: New WiFi 6E Standard Brings 5G-Related Technologies To Local Area Wireless

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Why WiFi 6E Is Way More Important Than WiFi 6 WiFi 6E is a big deal, and today I’m going to tell you how this is going to help you and your smart home, as well as just generally with WiFi reliability and WiFi signals in your home. There is a ton about WiFi 6E that is important and there are many reasons it’s above and beyond 802.11AX or what is known as WiFi 6. See, there’s this one component of the upgrade from WiFi 6 to WiFi 6E that’s so important to your smart home, and it resides in something that we have to talk about all the time on the channel. We have to constantly readjust our WiFi channels to avoid the neighbor next door. Or, we have to watch out where our ZigBee network is because it can be interfered with by our #WiFi. #WiFi6E gives us another option because it’s going to give us a 6 GHz frequency to use, and a ton of bandwidth within that range to use. It’s going to keep your neighbor’s network far away from yours in terms of channel and so you’re going to have WiFi that isn’t interfered with! This will again prove why WiFi is still the final smart home protocol we will all be using in the end, but in the mean time, we will continue to use ZigBee with less interference in my smart home. So kiss goodbye to #802.11AX and say hello to the E version of that standard. It’s part 1 of 3 parts of the upgrades before the next version of WiFi (7) in a few years. Enjoy! The charts we used: https://www.testandmeasurementtips.co… https://www.networkcomputing.com/wire… http://www.revolutionwifi.net/revolut… https://www.pcworld.com/article/32693… Research papers used directly in this video: https://www.nctatechnicalpapers.com/P… Subscribe to Take The Frustration Out Of Automation: https://www.youtube.com/channel/UCtRS… Join our Patreon Group to get direct access to me (and for even deeper content): https://patreon.com/automateyourlife Our recommended smart home products for every situation (affiliate link): https://amzn.to/2DwC6ah Are you unsure about putting a smart speaker or smart display in your home? Read our short e-book here: https://www.amazon.com/dp/B07XKRM6XS AYL Merch! https://shop.spreadshirt.ca/automatel… Automate Your Life is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com and other Amazon websites. Thanks for watching, and Don’t Hate, Automate. Brian
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