Published Fri, 14 Sep 2018 09:39:59 -0400 on Seeking Alpha
This research report was produced by The REIT Forum with assistance from Big Dog Investments.
One of the major risks for investors in preferred shares is the potential for interest rates to increase. Since many preferred shares have a flat coupon rate, an increase in bond yields would have the potential to put some pressure on the share price.
At the moment, we are seeing bond yields rising again, but overall, we have been relatively flat for the last several months at the long end. We believe the 10-year Treasury yield over the next few months is unlikely to break above 3.25%. We wouldn't be surprised to see it under 3.5% a couple years from now. In the span of a couple years, investors in preferred shares can recoup a significant amount of their investment. For instance, investors picking an individual security with a 7.4% dividend yield would receive more than 22% of their original investment back in the first 3 years.
iShares preferred stock ETF The iShares U.S. Preferred Stock ETF (PFF) is popular among some income investors. It offers a higher dividend yield than most ETFs. For the income investors, the monthly dividend is another selling point. While I believe preferred shares can be an excellent source of additional yield, there are superior options to using ETFs for this exposure.
I see 3 major problems with preferred shares ETFs.
Problem 1 Preferred share ETFs carry a high expense ratio and PFF is one of the better ones in this metric:
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|ANNALY CAPITAL MANAGEMENT||9.99||4.0||2.52||1.20||11.99|
|APOLLO COMMERCIAL REAL ESTATE FINANCE||18.80||12.6||1.49||1.84||9.82|
|NATIONAL RETAIL PROPERTIES||48.25||25.3||1.91||2.00||4.09|
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