A 7% Yield And Safety... What Could Be Better?

Nathan Slaughter's picture

Wednesday, April 10, 2019 - 2:30pm

by Nathan Slaughter

It's the longest-tenured fund holding in my High-Yield Investing premium portfolio... and for good reason. 

After all, most investors probably don't associate 7% yields with safety -- much less outperformance. But with the John Hancock Premium Dividend (NYSE: PDT) fund, you get all that and more.  

After a rare down year in 2018, PDT is once again at the top of the charts in 2019. It has delivered a return of 21.6% so far, doubling its category average -- and scoring in the top 1% of its peer group.

Launched by John Hancock in 1989, this closed-end fund targets dividend-paying preferred and common stock. There are more than 100 securities in the portfolio issued by cash generators such as Verizon (NYSE: VZ) and Kinder Morgan (NYSE: KMI). But the biggest weighting goes to utilities and financial firms, which occupy nearly 80% of assets.

If a utility sector fund and preferred stock fund had an offspring, it would look a lot like PDT.

Since preferred stocks are primarily issued by banks, brokerage firms and insurance companies, it's no surprise that the portfolio is dominated by names such as Morgan Stanley, Capital One and Prudential.
The heavy concentration in regulated power and gas providers such as Centerpoint Energy (NYSE: CNP) prevents the fund from fully participating in runaway bull markets. But it also provides some ballast in choppy conditions -- not to mention robust yields of 4% to 6%.

As a closed-end fund, PDT takes advantage of tactics that plain vanilla index funds lack. For starters, it utilizes leverage (about 34% of assets), borrowing money at low rates and then reinvesting in higher-paying securities. That strategy involves more risk, but also generates greater income and benefits fundholders over the long haul.

At the same time, the fund's managers have used U.S. Treasury futures contracts to hedge against rising interest rates -- a smart move thus far. The annual expense ratio of 1.52% certainly isn't the cheapest around. But PDT has been well worth it, outperforming 99% of its rivals over the past 15 years with annualized returns of nearly 11%.

Action to Take 
If you're looking for a high-yielding fund, then consider PDT. As I mentioned earlier, we've held it for a long time over at High-Yield Investing -- over two years as a matter of fact.

The fund is trading at an 8% premium to its net asset value (NAV). But that's normal for this top performer; it hasn't been below NAV since 2016.

Management has an upbeat outlook for 2019, noting that banks have met their regulatory capital and liquidity requirements. As such, they don't have as much need these days to raise money through preferred stock offerings. In fact, many are exercising call options and redeeming issues. That has shrunk the supply pool -- while demand for these high-yielding bond proxies is as strong as ever.

With a conservative portfolio and healthy 7%-plus distribution yield, PDT is a "Buy" at current levels. But it's just one of the many high-yielders we cover over at my premium newsletter, High-Yield Investing. If you check out my latest report, you'll learn about a list of "secret dividends" I've compiled, plus you'll get the chance to access my entire portfolio of picks. To learn more, go here. 

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.