Investors have an opportunity to nab some solid yields in preferred securities, despite potential headwinds this year, according to Bank of America. Preferreds have features of both stocks and bonds. They trade on exchanges like equities, but also have par values and pay a stream of income. Like bonds, when the price of a preferred goes down, the yields rise. Despite a sell-off in December, preferred stock saw favorable returns last year. The broad market $25 par preferreds, as measured by the ICE BofA Core Plus Fixed Rate Preferred Securities Index, returned 7% in 2024 — better than investment-grade corporate bonds, said Michael Youngworth, head of global convertibles and preferreds strategy at Bank of America Securities. The index has an effective yield of 5.04% and yield to maturity of 6.28%. The $25 par preferreds are sold to retail investors, while $1,000 preferreds tend to be targeted to institutional investors. While many have long maturity dates or are perpetual, they usually have ” call dates ,” which is when the issuer can redeem them. Yields are attractive, Youngworth said returns may be rocky this year now that the Federal Reserve is expected to be less aggressive in lowering interest rates than had initially been thought last summer and autumn. Tailwinds to headwinds “The duration and technical tailwinds that helped to propel preferreds during the first 10 months of 2024 may become headwinds as rates may stay in an elevated trading range, a function of potentially inflationary policy and a more measured pace of monetary easing,” Youngworth wrote in a note last Thursday. “Ultimately, we think this favors shorter duration structures within preferreds,” he added. However, he believes once there is more clarity on policy, it may provide an opportunity to buy duration . Here are some of the $25 par fixed-rate preferreds Bank of America recommends. They have at least two years of call protection or are selling at a more than 15% discount to their par price. Also included in Bank of America’s recommendations are fixed-to-floating rate preferreds. These assets were among the top performers in the sector in December, when investors moved away from those with longer duration, Youngworth noted. The recommended fixed-to-floating rate preferreds also have at least two years of call protection. The coupon rates are fixed until the call date and if the security isn’t called, the rate floats. Here are two of the bank’s recommendations. Investors who favor broad-market exposure can invest in preferreds via exchange-traded funds. For instance, the iShares Preferred and Income Securities ETF (PFF) has a 30-day SEC yield of 5.78% and 0.46% expense ratio. It had a total return of 7.88% in 2024. The Global X U.S. Preferred ETF (PFFD) has a 6.41% 30-day SEC yield and 0.23% expense ratio. It had a total return of 7.24% last year, according to Morningstar.
