A mandatory feature in any investors' portfolio should be a high dividend paying asset that produces a regular yield on monthly pay out basis. In fact a much safer way to facilitate this is through Preferred Securities ETF or in other words, a fund that tracks the performances of the S&P Enhanced Yield Northern America Preferential Stock index. The index has given an annualized returns of 4.79% since last five years and on most occasions outperformed its bigger cousin S&P US preferred index.
Know your Index:
The North American Yield index depends on the performance of the highest yielding preference equities listed on USA and Canada Exchanges. Of course the market caps and minimum liquidity is also a criteria. Equity wise the benchmark is heaviest on Credit Suisse which along with American International, Wells Fargo Capital makes the top three equities.
HSBC Holdings, which is a part of the aforesaid benchmark with +3% allocations has given an yearly yield of +7.74%.
Vis a Vis common stocks, these are less volatile and bestow an ample yield quite similar to top yielding bonds. Preferreds as they are commonly called provide safety that is also closer to bonds in a company lock down scenario, hence most analyst consider them as hybrids or a cross between stocks and bonds
Case for Preferred Stocks Mutual Funds and ETFs:
A strong support case emerges due to the projected possibilities and at a time when markets are failing to respond to any stimuli. Amid an uncertain crude scenario and slow real estate markets, it is quite likely that US remains a tight market for another fiscal year and naturally the corporate profits and cash flows will shrink. Euro Debt crisis is not going anywhere in a hurry, adding on to further strains on the capital markets of the developed economies. Investors stuck in these lackluster surroundings will find hard to resist asset classes giving a regular 6%-7% yield and that too with an arguable future growth promise and monthly payouts.
Wait! Not everything is hunky-dory.
Though a calculated investment in a preferential security ETF is strongly recommended for investors looking out for regular income, it is not a solution to all financial woes.
One should understand that high yielding product is a rare commodity and has a limited upside as promoters have an option for a buy back on face values. Known as a "Call" feature which is attributed with most options in this class, enables a promoter to retrieve shares on face-value of the stocks after five years of the issuance. Thus in case of a rally or a major upside, promoters generally exercises this option to increase their stakes in the company.
A preferential stake owner has an edge over the common stock holder in terms of dividend payouts during bankruptcy, but mostly have lesser rights in claiming the assets of the company and that is why they get very little or nothing if company decides to liquefy itself.
The high yield greed often makes investors enter into this territory without completely understanding the downsides. As a rule, one aiming to initiate a regular high payout routine should only be considering the Preferred Stock Mutual Fund because long term capital appreciation is very limited. Out of your share of fixed income investments, allocation of 10-15% of assets is a definite rational move.
The high yielding preferred securities ETFs empowers the buyer with a robust profile without the painstaking research work. With a little caution, market participants must use this asset type to generate a regular income and to balance out a portfolio especially at a time when risk appetites are non-existent in the future and equity markets world-wide.
Global X Preferred Stock ETF is the only pure play on the S&P Enhanced Yield Northern America Preferential Stock index. SPFF was launched in July 2012 and has an expense ratio of 0.58%.
The SPFF ETF's top equity exposure is extended into Credit Suisse PFD and American International Group PFD both committed to a +7.5% annual yield. Higher yield churning stocks include Prudential Financials PFD and Santander Financials PFD with 9% and 10.5% projected dividends respectively.