John Hancock Preferred Income Fund: A Hedge Against Equities Volatility

John Hancock Preferred Income Fund (NYSE:HPI) is a great way to hedge your portfolio against traditional equities' uncertainties and volatility. The fund aims to provide a high level of income to investors through a diversified portfolio of preferred securities. Its high leverage limits appeal to investors seeking consistent income and low volatility.

John Hancock Preferred Income Fund (NYSE: HPI) offers investors a hedge against traditional equities' volatility and uncertainty. The fund aims to provide attractive income through a diversified portfolio of preferred securities and corporate bonds. However, recent performance and high leverage usage have raised concerns among investors.

Over the last twelve months, HPI's share price has declined by approximately 8.44%, despite total returns breaking even due to distributions. The fund's high dividend yield of 8.5% and monthly payouts make it appealing to income-focused investors. However, the heavy use of leverage, currently at 37.96% of assets, is suppressing the share price and internal earnings. This is particularly concerning given the current higher interest rate environment, which has reduced net investment income levels.

HPI's strategy involves investing at least 50% of assets into investment-grade securities, with a focus on preferred stocks. The fund's top holdings include large-cap banks like Bank of America (BAC) and Wells Fargo (WFC), but investors should note that HPI holds these positions through preferred securities rather than common stock. This limits the fund's ability to provide capital appreciation.

The fund's performance over the last decade has been disappointing, with a share price decline of 10.24%. However, including all distributions, the total return jumps to nearly 102% over the same period. This highlights the importance of distributions in HPI's return profile.

HPI's high dividend yield does not guarantee high returns. During market downturns, such as in 2022, the fund experienced significant losses despite offering a high yield. The fund's reliance on distributions for returns, coupled with its high leverage usage, makes it vulnerable to market downturns and elevated interest rates.

Despite these challenges, HPI's net investment income levels have remained consistent over the last few years. However, the current levels are lower than in previous years, due to thinner operating spreads related to leverage. This reliance on net realized gains for NAV growth and distribution support leaves the fund vulnerable to market trends.

HPI's high leverage usage, exposure to below-investment-grade securities, and reliance on distributions for returns make it an appealing choice for income-focused investors seeking low volatility. However, the current high interest rate environment and high premium to NAV may limit its appeal. Investors should carefully consider these factors before investing.