High Dividend ETFs: Preferred Stocks Down but Not Out

by: MyPlanIQ

In the past month, we have seen continuous strength in both U.S. and international REITs (IYR, ICF, VNQ, RWX) while preferred stocks (NYSEARCA:PFF) has lagged persistently.

Last week, though being out performed by S&P 500 index (NYSEARCA:SPY), U.S. dividend stock ETFs (VIG, VYM, PEY, SDY, FVD, DVY) had another lift. For more detailed performance, refer here.

The following table shows the trend scores of dividend ETFs we track.

Assets Class Symbols 02/02






iShares Dow Jones US Real Estate IYR 11.12% 10.74% ^
SPDR S&P 500 SPY 9.92% 10.47% v
SPDR DJ Wilshire Intl Real Estate RWX 8.92% 10.32% v
iShares Dow Jones Intl Select Div Idx IDV 8.76% 8.61% ^
Vanguard High Dividend Yield Indx VYM 8.69% 9.41% v
Vanguard Dividend Appreciation VIG 7.98% 9.17% v
PowerShares Intl Dividend Achievers PID 7.98% 8.91% v
iShares MSCI EAFE Index EFA 7.3% 7.58% v
First Trust Value Line Dividend Index FVD 7.07% 7.48% v
iShares Dow Jones Select Dividend Index DVY 6.94% 7.23% v
SPDR S&P Dividend SDY 5.99% 6.56% v
PowerShares HighYield Dividend Achievers PEY 5.64% 6.49% v
iShares MSCI Emerging Markets Index EEM 4.4% 7.24% v
iShares S&P U.S. Preferred Stock Index PFF 2.11% 3.3% v

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

From the above table, we again observe Preferred Stock Index (PFF) is the laggard, being ranked at the bottom. However, one should note that our trend scores show short to intermediate term trends. If we expand the time horizon, a different picture emerges.

iShares PFF is designed to track S&P U.S. preferred stock index. Based on the S&P document, the index is market capitalization weighted on U.S. preferred stocks that have at least $100 million market cap and meet certain liquidity criteria.

Preferred stocks are hybrids between common stocks and bonds. Shareholders of preferred stocks usually receive guaranteed dividends and in the event of company liquidation (bankruptcy), they have higher priority over common stock shareholders to claim the assets. Many preferred stocks can be convertible to common stocks (under certain conditions), thus creating capital appreciation upside (Warren Buffett's purchase of Goldman Sachs convertibles during the financial crisis is a good example).

One of the major drawbacks of preferred stocks is their liquidity: they are certainly less liquid compared with common stocks. A perferred stock ETF is thus less diversified than a normal common stock ETF.

The following table show the annual performance of PFF and SPY since PFF's inception (4/18/2007) to 2/9/2011.

2007 2008 2009 2010 2011 Inception
PFF (%) -17.69 -23.84 38.70 13.83 1.55 1.23
SPY (%) 1.01 -36.8 26.35 14.58 5.17 -0.81

The table clearly shows that PFF has out performed SPY since its inception. The dual properties (common stock and bond) were more resilient to market stress.

To summarize, preferred stocks are down but not out. Income seeking investors should include such ETFs in their portfolios. On the other hand, a systematic fund selection method such as the asset allocation strategies in Retirement Income Plan should be employed so that one can take advantage of the uniqueness of preferred stocks in a portfolio.

Disclosure: I am long IYR, SPY.