Unlocking Income Potential: Why Preferred Securities from Banks May Be Your Next Investment Strategy

For savvy investors looking to enhance their portfolio’s income generation, exploring newly issued preferred securities from banks could be the key to unlocking substantial returns. At Extreme Investor Network, we provide you with the insights that can set you apart in the world of investing. Here’s everything you need to know about why these instruments could be a game-changer for your income strategy.

Understanding Preferred Securities

Preferred securities are unique financial instruments that blend features of both stocks and bonds. They are publicly traded, offering a steady income stream typically paid out on a quarterly basis. Investors in preferred stocks can anticipate yields that often exceed 5%, making them an attractive addition to a diverse portfolio. A distinct advantage is that the income generated by preferreds may enjoy favorable tax treatment, often taxed at capital gains rates of 0%, 15%, or 20%, based on your taxable income. This is particularly beneficial compared to traditional bonds, whose income is taxed as ordinary income, potentially as high as 37%.

Banks Lead the Charge

Leading banks and utility companies are the primary issuers of preferred securities, with financial giants currently launching some highly attractive offerings. According to Michael Youngworth, Bank of America’s head of global convertibles and preferreds strategy, numerous large banks have recently engaged in refinancing efforts that have resulted in enticing new securities.

Among these notable institutions, names like Goldman Sachs, JPMorgan, and Citi stand out, with newly issued $1,000 par preferreds averaging a coupon rate of 6.7%. While institutional investors often dominate the $1,000 par market, the $25 par category is specifically designed for retail investors, making this an excellent avenue for individual investors looking to gain exposure.

Unique Opportunities and Risks

When considering individual preferred securities, it’s essential to understand the nuances. Many preferreds feature fixed rates for the entire duration, or they may be "fixed-to-floating," allowing the rate to adjust after a set period. Typical maturity for these securities is either long-term or perpetual, but they often include "call dates," permitting issuers to redeem them before maturity.

Among our recommended offerings, you might consider:

• An Allstate perpetual preferred with a striking 7.375% coupon and a call date of July 15, 2028.
• A 7.5% coupon preferred from M&T Bank, which is also perpetual with a call date of June 15, 2029.
• For those looking for floating-rate options, the Regions Financial preferred offers a 6.95% dividend with a call date of September 15, 2029.

It’s worth noting that perpetual securities are sensitive to interest rate fluctuations, which can affect their pricing. As rates rise, prices on preferreds typically fall, introducing a layer of volatility to these investments. Monitoring the credit ratings of issuers is critical — within the preferred securities market, only those rated BBB- or higher by Standard & Poor’s are considered investment-grade.

Diversifying Through ETFs

If you’re interested in a more diversified approach, consider investing in an ETF focusing on preferred securities. As highlighted by Youngworth, the retail buying trend has leaned toward shorter-duration, floating-rate preferred structures. The Invesco Variable Rate Preferred ETF (VRP) has recently attracted nearly $27 million in inflows and boasts a total return of about 10.3% over the past year, accompanied by a competitive expense ratio of 0.5%.

Other ETFs to note include the iShares Preferred and Income Securities ETF (PFF), with a 6.5% total return over the past year and an expense ratio of 0.46%, and the First Trust Preferred Securities and Income ETF (FPE), which offers a 10.7% return with an expense ratio of 0.84%.

Take Action Today

Navigating the world of preferred securities can be complex, but understanding the intricate details positions you to capitalize on lucrative opportunities. As you consider adding these income-generating assets to your portfolio, remember that informed decision-making is key.

At Extreme Investor Network, we are committed to helping you make those informed decisions, giving you the edge you need to thrive in today’s market. Whether you choose to explore individual offerings or opt for ETF investments, preferred securities from banks may just become a cornerstone of your income strategy.

Stay tuned for more insights, and don’t forget to subscribe to our newsletter for the latest updates on investment strategies tailored to you!

This revamped blog post is tailored to engage readers and drive them towards choosing your platform, Extreme Investor Network, for their investment insights and strategies.