Does it Make Sense to Hold Preferred Stock Closed End Funds at This Time?
By: Tim McPartland,
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).