PFF - NPFD: Do Not Let The Fund's Name Fool You

2024-05-31 13:18:57 ET

Summary

• The Nuveen Variable Preferred & Income Fund is a preferred stock fund that claims to invest in securities with dividend payments based on interest rates.
• Despite the yield curve being inverted, the NPFD closed-end fund's current yield of 8.27% is not as high as most variable-rate debt funds.
• The fund's performance since its inception has been disappointing, with a decline of 30.64%, and it has underperformed most of its peers.
• The fund's portfolio appears to consist primarily of fixed-rate securities, not variable-rate preferred stock, so the interest-rate risk is a lot higher than it should be.
• The fund has a very attractive valuation right now, but its history of underperformance relative to peers makes it difficult to recommend.

The Nuveen Variable Rate Preferred & Income Fund ( NPFD ) is a closed-end fund ("CEF") that can be employed by income-seeking investors as a way of achieving their goals. As the name of the fund suggests, this is a preferred stock fund, just like many others that we have discussed in this column. However, this fund invests in securities that make dividend payments to their owners that change based on interest rates. This is something that might be very appealing today, since the yield curve is inverted (and has been since July 2022):

The reason why this is important is that it means that assets with a dividend or coupon that is based on short-term rates will have a much higher yield than assets whose dividends or coupons are based on long-term rates. As we will see in this article, the yield of variable-rate preferred stock depends on short-term interest rates instead of long-term interest rates like ordinary preferred stock. As such, we can expect that this fund will have a much higher yield than many other preferred stock funds....

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