HPI - FPF: Improving Diversification, But Wait For A Better Entry Point

2025-03-21 10:13:33 ET

Summary

• The First Trust Intermediate Duration Preferred & Income Fund offers a high yield of 8.92%, superior to most index funds and many peers.
• Preferred stock dividends are taxed more favorably than bond interest, making the fund attractive for income-focused investors concerned with taxes.
• The fund fully covered its distributions in the most recent year, but it had to rely on its unrealized capital gains to do so.
• The fund's recent performance has been disappointing, with a 1.12% decline in share price, but it still outperformed the preferred stock index.
• The fund's current valuation is less attractive than its historical average, suggesting it might be wise to wait for a better entry point.

The First Trust Intermediate Duration Preferred & Income Fund ( FPF ) is a closed-end fund that investors in search of income can purchase as a method of achieving their goals. As is the case with many closed-end funds, the First Trust Intermediate Duration Preferred and Income Fund boasts a yield that is superior to that of most comparable index funds. As of the time of writing, this fund yields 8.92%, which as we can see here is well above the yield of most index exchange-traded funds:

As of the time of writing, the highest-yielding fixed-income index is the one that tracks domestic junk bonds. However, this index along with any bond index does not offer nearly the same potential income when purchased in an ordinary taxable account. This is because of the way that bond coupons are taxed, at least in the United States. In short, the income that is received from a bond or a bond fund is taxed at ordinary income rates. This would give us the following after-tax yields for an investor in the top income tax bracket:

For further details see: