Investors looking for yield might be interested in the SPDR Wells Fargo Preferred Stock ETF (PSK). Preferred stocks have dividends that are paid out before dividends to common stockholders. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation. If a company liquidates, bondholders are paid first, preferred shareholders are paid second, while common stockholders are left at the end of the line.
The dividends of preferred shares are typically higher than the equivalent common shares. However, the preferred shareholders do not have voting rights.
PSK is a preferred shares ETF which yields 6.5% and is comprised of the preferred shares of about 138 companies. The fund offers a high yield along with a basket of companies that reduces individual stock ownership risk. The fund has an expense ratio of 0.45%.
Financial companies dominate the fund, comprising 82.51% of the ETF. Utilities have the second largest presence with 5.56%. This is followed by telecommunication services 2.79%, Industrials 2.7%, Consumer durables 1.08%, and Consumer Discretionary 0.88%.
Here's a look at the top 5 holdings in the fund:
Weight of Fund
Expected 5-Year Annual
Barclays Bank plc (BCS)
PNC Financial Services Group (PNC)
Wells Fargo (WFC)
HSBC Holdings plc (HBC)
Credit Suisse Guernsey (CS)
We can see that the banks are undervalued with Forward PE ratios under 9 and price to book ratios under 2. These institutions should continue to perform well for the long-term, given the current attractive valuations and future earnings growth.
One advantage of preferred shares is the fact that they have less volatility as compared to common stock. This is important for those investors seeking a high yield without experiencing high volatility in the underlying shares. Furthermore, preferred shares are considered callable, meaning that the company has the option to purchase shares from shareholders at any time, usually at a premium.
In addition to the attractive 6.5% yield, the PSK ETF also provides capital appreciation. The market value of the fund has achieved 11.14% annually since inception in September 2009. It has risen 12.38% in the last 12 months and is up 13.85% year-to-date.
Here is the fund's quality rating breakdown:
Investors should be aware that dividends for preferred shares are taxed as income. This is something to keep in mind, depending on the investor's tax bracket and how the fiscal cliff resolution plays out.
The PSK ETF is something for high-yield investors to consider. With a basket of preferred stocks, investors have much lower risk than owning the preferred shares of an individual company.