Does it Make Sense to Hold Preferred Stock Closed End Funds at This Time?

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Just sitting here daydreaming for a minute it struck us that holding preferred stocks CEF’s (Closed End Funds) at this time is maybe not smart.  Given that   we have a decent potential for increasing interest rates next year maybe we should do the obvious.

We see that the preferred stocks CEF’s and ETF’s remain a couple percent off of their yearly higher as of this moment.  The current yield on the CEF’s is between 6.9% on the low end and 8.4% on the upper end.  But we understand that perpetual preferreds are going to get murdered when/if rates move higher–and the CEF’s will get hit harder than the actual shares as they are all levered (between 27% and 34%).  

So to summarize–if you are moving toward longer durations don’t be stupid and hold a bunch of preferred stock CEF’s.  We fit the stupid camp–we will begin to unload our shares now.  Many times my wife tells me ‘for a smart man sometimes you miss the obvious’–and once again she is right (but don’t tell her).

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