Bank of America says investors have an opportunity to capture solid yields on preferred securities this year despite potential headwinds. Preferred has characteristics of both stocks and bonds. They trade on exchanges like stocks, but they also have a face value and provide a source of income. Like bonds, when the price of a senior bond falls, its yield rises. Despite a sharp decline in December, preferred stock returns have been strong last year. Michael Youngworth, Head of Global Convertible and Preferred Bond Strategy at Bank of America 7%, which he said is better than investment-grade corporate bonds. securities. The index has an effective yield of 5.04% and a yield to maturity of 6.28%. Preferred stocks with a $25 par value are sold to individual investors, while preferred stocks with a $1,000 face value tend to be targeted at institutional investors. Many have long or indefinite maturities, but usually have a “call date” from which the issuer can redeem them. Youngwirth said yields are attractive, as the U.S. Federal Reserve is expected to be less aggressive in lowering interest rates this year than originally thought last summer and fall. He said returns could be volatile. From tailwinds to headwinds “During the first 10 months of 2024, the period and technical tailwinds that helped drive priority rates have continued to move rates into a higher trading range, with the impact of underlying inflation policy and a more cautious pace of monetary easing.” “It could be a headwind because there is a possibility that it will stay in place,” he said. Youngwirth wrote in a memo last Thursday. “Ultimately, we think this favors shorter-duration structures within priority windows,” he added. However, he believes there may be an opportunity to buy duration as policy becomes clearer. Here are some of the $25 face value fixed-rate preferred rates recommended by Bank of America. They come with at least two years of call protection or are sold at a discount of 15% or more from face value. Bank of America's recommendations also include preferential rates from fixed to variable rates. Youngwirth noted that these assets were among the sector's best performers in December as investors moved away from longer duration assets. The recommended fixed rate to variable rate priority service also comes with at least two years of call protection. The coupon rate is fixed until the call date, and if the security is not called, the rate will fluctuate. Here are two bank recommendations. Investors who prefer broad market exposure can invest in preferred stocks through exchange-traded funds. For example, the iShares Preferred & Income Securities ETF (PFF) has a 30-day SEC yield of 5.78% and an expense ratio of 0.46%. The total return in 2024 was 7.88%. Global X US Preferred ETF (PFFD) has a 30-day SEC yield of 6.41% and an expense ratio of 0.23%. Last year's total return was 7.24%, according to Morningstar.
CHOOSE LANGUAGE
SELECT LANGUAGE BELOW
