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.

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How to Buy Happiness (Responsibly)

The great reopening offers ample opportunity to lift your spirits if you have some money to spare. Here’s how to do it right. Bring on the nationwide spending binge. Half of all people over 18 in the United States are now fully vaccinated. Tens of millions of them are emerging, blinking in the springtime sunshine, and heading straight for restaurants, movie theaters or a flight to somewhere — or anywhere, really.

It is true that millions of people are still trying to get their hotel jobs or theater gigs back. But collectively, Americans are holding on to a larger share of their income than they have in decades.

That leftover money is a kind of kindling. We may look back on this moment as a once-in-a-lifetime period, when many millions of Americans felt that money was burning actual holes in their pockets.

It is an unfamiliar sensation for many of us. “There is a puritanical streak that runs through all aspects of money in America,” said Ramit Sethi, an author who focuses more attention than most on spending well in addition to saving intelligently. “And most of the conversations start with no.”

But we should consider the strong possibility that saying yes right now could bring a true improvement in happiness. So this column — and another one next week — will be about maximizing it through strategic spending.

The conversation begins with “Yes, and … — with perhaps with a side order of “Yes, but …” To help us all get there, I called on some of my most thoughtful contacts among people who talk, think or write about money. And I made sure to ask them this: What are you doing yourself?

Brian Thompson, a financial planner in Chicago, was prepared for this moment. He generally has two questions at the ready: What do you want to spend your money on? And why are you really spending it?

There are no wrong answers, Mr. Thompson said. “I always come from the approach that there is no judgment, and I try to come with empathy to help people clarify what the money means for them,” he said.

Paradoxically, the first thing to think about here is saving. Paulette Perhach said it better than I could here in her classic 2016 article exhorting everyone to build a freedom fund. (“Freedom” is my word — she uses an F-bomb, if you’re trying to find it via internet search.)

Savings aren’t just for when your car breaks down or you get sick. Having a freedom fund means you are not beholden to someone else — whether that’s a significant other who is treating you like garbage or a boss who is harassing you or otherwise making you miserable.

“This is about power, and power comes in a lot of different forms,” Ms. Perhach, an essayist and a writing coach, told me this week. “It comes from options. From looking at life and making sure one person does not have so much say over the outcome of your finances that you would have to tolerate behavior that goes against your own self-respect.”

Every few years, I reopen my well-worn copy of “Happy Money: The Science of Happier Spending,” a book from 2013 by Elizabeth Dunn and Michael Norton, for a review session. This time, I called Professor Dunn, a member of the psychology department at the University of British Columbia, to help me along.

A first principle of research in this area has generally been that buying an experience brings more satisfaction — and less buyer’s remorse — than buying stuff. In the years since the book was published, Professor Dunn said, this conclusion has largely held up for people with more money, though it can be less true for people farther down the socioeconomic ladder.

So what types of experiences should we be making a priority?

After a year marked by loss, I adopted a narrow approach focused on things that I might not have a chance to do again. I will never attend another John Prine concert or again eat food touched by the hands of Floyd Cardoz, both of whom were among the many we lost to the pandemic.

But there are things I can do instead that aren’t likely to recur, like attending my friend’s swearing-in ceremony as police chief in another state. And I’m prioritizing a trip with my daughters to the Great Barrier Reef (using approximately 9,000 years of frequent-flier mile savings) before it is no more.

Professor Dunn endorsed my plans, and the need to get out into the world again. “The only experiences I’ve been having are Netflix and DoorDash,” she said.

Professor Dunn lost her mother, Winifred Warren, to lung cancer in September and has a plan to celebrate her someplace other than a Zoom chat. Soon, she’ll get over the border to California and dine with her aunt and her mother’s best friend at the famed French Laundry — where Ms. Warren had been hoping to go herself, once she got better.

But just because so much fun seems available again all at once, it doesn’t mean you should pursue it all simultaneously. People who have reasonably high incomes — but the proclivity to go the immediate gratification route — can rack up quite a bit of debt,” Professor Dunn said.

Indeed, credit card issuers are licking their lips in anticipation of whatever orgy of spending ensues this year. Ms. Perhach found herself impulsively buying concert tickets recently and was inspired to pen a warning about the behavioral science of overspending for Vox.

The gratification doesn’t necessarily last long — and can even be wiped out by the dread of any new debt, she said. “I’ve done trips with an undercurrent of ‘I’m about to be in trouble,’” she told me this week. “And that’s not a great recipe for fun.”

If you are among the many lucky millions who are better off financially than you were at the beginning of 2020, consider how good it might feel to give something away.

Minnie Lau has spent much of the past year helping her accounting clients in the San Francisco Bay Area spend and save the windfalls from initial public offerings and other stock winnings in as tax savvy a manner as possible. Both they and she have done quite well. They did nothing wrong and have nothing to apologize for.

But amid so much death, fear and suffering, coming out ahead still leads to conflicted feelings. “My ill-gotten gains are going to the food bank,” Ms. Lau said of the money she has made investing this year. “People should not have to line up for food. Didn’t California just announce that it had a surplus? What kind of crazy world is this?”

Everyone else I talked to this week felt a similar urge. Professor Dunn recalled being overwhelmed with gratitude after receiving her coronavirus jab. Now, she’s a monthly donor to UNICEF’s vaccine equity initiative. Ms. Perhach is supporting VONA, which helps writers of color, while Mr. Sethi busted into his emergency fund to donate to Feeding America and match his readers’ donations.

Mr. Thompson, the financial planner, has given money to help people who are both Black and transgender — a segment of the population that he believes needs more help than most. And he’s redoubling his efforts at work to reduce the racial wealth gap.

“If I can help more people build more wealth to pass down, it is a way of serving my purpose and helping people in the process,” he said. “And I think that takes more than just giving. It means systemic change.”

Ron Lieber

 

 

Source: https://www.nytimes.com/

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Critics:

Money management is the process of expense tracking, investing, budgeting, banking and evaluating taxes of one’s money which is also called investment management. Money management is a strategic technique to make money yield the highest interest-output value for any amount spent. Spending money to satisfy cravings (regardless of whether they can justifiably be included in a budget) is a natural human phenomenon.

The idea of money management techniques has been developed to reduce the amount that individuals, firms, and institutions spend on items that add no significant value to their living standards, long-term portfolios, and assets. Warren Buffett, in one of his documentaries, admonished prospective investors to embrace his highly esteemed “frugality” ideology. This involves making every financial transaction worth the expense:

1. avoid any expense that appeals to vanity or snobbery
2. always go for the most cost-effective alternative (establishing small quality-variance benchmarks, if any)
3. favor expenditures on interest-bearing items over all others
4. establish the expected benefits of every desired expenditure using the canon of plus/minus/nil to the standard of living value system.

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