FLC: Preferred Stocks Are Doing Well, But Don't Ignore The Risks

Core Viewpoint - The Flaherty & Crumrine Total Return Fund has seen a decline in attractiveness as an income vehicle, yielding 6.70%, which is lower than its peers, primarily due to high leverage and subsequent losses from rising interest rates [3][21]. Fund Performance - The fund's yield of 6.70% is significantly lower than peers such as Cohen & Steers Select Preferred & Income Fund (8.80%) and First Trust Intermediate Duration Preferred & Income Fund (7.78%) [3]. - Over the past year, the fund has delivered the worst performance among its peers, attributed to its low yield and high leverage [3][5]. - Despite a recent gain of 3.37%, the fund's performance remains subpar compared to the preferred stock index, which has been flat [3][4]. Interest Rate Impact - Long-term interest rates have risen, with the ten-year U.S. Treasury Note yield increasing from 4.03% to 4.488% [3]. - The market's expectation of rapid interest rate cuts has led to a paradox where preferred stock prices have not declined as expected [3][4]. - The fund's leverage, which is at 39.20%, is higher than many peers, making it more susceptible to market corrections [15][21]. Distribution Analysis - The fund pays a monthly distribution of $0.0897 per share, resulting in a yield of 6.70%, but has a history of inconsistent distributions, having cut them multiple times in recent years [16][17]. - For the fiscal year ending November 30, 2023, the fund's total investment income was $20.14 million, insufficient to cover the $11.44 million in distributions, leading to net asset value declines [19]. Investment Strategy - The fund primarily invests at least 80% of its total assets in preferred securities and other income-producing securities, with a focus on the financial sector [6][10]. - The fund's asset allocation includes 70.8% in preferred stock and hybrid securities, 21.2% in contingent capital securities, and 2.4% in corporate debt [7]. Valuation - The fund currently trades at a discount of 12.65% to its net asset value, which is consistent with its average discount over the past month [20]. Conclusion - The Flaherty & Crumrine Total Return Fund, while popular, faces challenges due to high leverage and inconsistent distributions, making it a high-risk investment in the current interest rate environment [21].