IGR - DFP: Preferred Stocks Are Probably Overpriced Right Now

2024-01-29 05:08:19 ET

Summary

• The Flaherty & Crumrine Dynamic Preferred and Income Fund has suffered losses over the past two years due to high leverage and had to cut distributions repeatedly.
• DFP's current yield of 6.72% is not impressive compared to other fixed-income funds.
• The fund's recent performance has been strong, but other preferred stock funds have outperformed it.
• The assets in the fund may be substantially overpriced, as the market appears to be projecting more rate cuts than are likely.
• It is probably best to sell the fund right now, but investors who want to bet on a systematic breakdown could hang on to it.

The Flaherty & Crumrine Dynamic Preferred and Income Fund ( DFP ) is a closed-end fund that income-focused investors can employ in pursuit of their objectives. Unfortunately, this fund suffers from some of the same problems as the other Flaherty & Crumrine preferred stock funds, as its high level of leverage resulted in severe losses when interest rates began rising about two years ago. As a result, the fund had to cut its distributions repeatedly and only has a 6.72% current yield today. This is not particularly impressive for a fixed-income fund, as many junk bond funds are able to sport higher yields. Floating-rate bond funds are even higher than that, with many of them approaching double-digit yields. Indeed, there are several preferred stock funds that boast more attractive yields than this one, including the three John Hancock funds that we have discussed over the past few weeks:

For further details see: