It should be a good year for preferred stocks, according to UBS. The securities, some of which yield close to 7%, are a hybrid product. They trade on exchanges like equities but have par values and pay income like bonds. When the value of a preferred stock rises, yields go down. “Preferreds are off to a strong start to 2024,” said Frank Sileo, senior fixed income strategist for the Americas at UBS. Preferreds typically have a fixed par value of $25, but they are also available in $1,000 par value. The $25 par value preferreds have seen a nearly 3% return year to date, he said. Preferreds are sensitive to interest rates. The securities have either a very long maturity date or no maturity date, but typically have a call date, which is when the issuing company can redeem them. While the Federal Reserve is expected to start cutting rates this year, the central bank has indicated it isn’t in a rush to do so . The yield on the 10-year Treasury has moved higher in recent weeks, as traders push back their expectations for when those cuts may begin. “We expect generally lower-trending interest rates to support the sector and produce solid 12-month returns,” Sileo wrote in a note last week. “However, valuations have tightened, and coupled with our expectation for near-term rate volatility, we could see a near-term pullback,” he added. Longer term, he projects returns in the high single digits for 2024 — or possibly higher. “Double-digit returns are possible especially if the economy continues to slow (and then stabilize) without triggering a significant, spread-widening credit event,” he said. Here are some of UBS’ top picks in the preferred securities sector with moderate risk.
