Preferred stocks have been under pressure for the last year. They move similar to bonds when interest rates change. Higher rates usually mean a lower share price for preferred stocks. Preferred stocks are a hybrid between a stock and a bond, with a set dividend payment when the stock is issued. Many preferreds have a maturity date or a call date that the company can “call” back the stock and pay you the price it was issued at – usually $25.00.
Invesco Preferred ETF (PGX) is a fund made up of preferred stocks from different companies. By investing in PGX you can diversify your portfolio and possibly reduce your risk by spreading your investment across different sectors, and also different asset classes. You can benefit from some of the potential growth of stocks, while having some of the stability of bonds. Investors do give up some growth for the fixed dividend payment, but the company must pay your preferred dividend before it can pay a dividend on its common stock.
On the downside, if you are looking for short term gains, PGX may not be the investment for you. Invesco Preferred ETF focuses more on long term investments rather than short-term gains. PGX is designed to give you an income stream (it pays monthly) instead of large capital gains. Capital gains can happen, that is just not their main objective. PGX’s market price has traded above and below its net asset value (NAV) over the past year. Currently it trades right at its NAV.
PGX does pay a monthly dividend with an annual yield of 6.28%. Instead of buying your own individual preferred stocks, the managers of PGX can choose the better quality, higher yielding investments and package them together to make up a portfolio that can keep paying you a comfortable monthly dividend. This also has the potential to give you more diversification than you could gather on your own.
With a high of $14.86 and a low of $11.01 over the last year, Invesco Preferred ETF seems to be rebounding some. It will be interesting to see what it does if more rate hikes happen this year. As the share price rises, the yield will fall if the fund’s payout remains the same. PGX might be worth a buy on a dip caused by another rate hike. Eventually the hikes will stop and prices for preferred shares as well as bonds will go back up.
Invesco Preferred ETF should be used as part of a larger diversified portfolio. It may fit in well with your fixed income portion in order to give you monthly income. As always, do your own due diligence before investing. Full disclosure, I do own shares of PGX. Sources include Schwab and Yahoo Finance.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record)
