Evaluating High-Yield Closed-End Funds in a Low-Growth Environment: The Case of John Hancock Preferred Income Fund III

In a world where economic growth remains subdued and interest rates linger at elevated levels, high-yield closed-end funds (CEFs) like John Hancock Preferred Income Fund III (HPS) offer investors a compelling mix of income and capital preservation. However, the sustainability of their dividends and the risks tied to leverage demand rigorous scrutiny. This analysis evaluates HPS’s $0.11 monthly dividend—equivalent to an 8.93% forward yield—and its ability to maintain payouts amid macroeconomic headwinds.

Dividend Sustainability: A Foundation of Earnings and Leverage

HPS’s dividend of $0.11 per share is underpinned by robust net investment income. For the three months ended July 31, 2025, the fund reported net investment income of $7.67 million, or $0.239 per share, a 6.7% increase from the same period in 2024 [3]. This growth, coupled with a trailing twelve-month net income of $65.5 million [1], suggests the fund has sufficient earnings to support its dividend.

The fund’s leverage strategy further amplifies its income-generating potential. As of August 1, 2025, HPS held $257.1 million in total debt, representing 37.53% effective leverage [4]. While leverage increases risk, HPS’s interest expense of 3.87% of total expenses [4] is relatively modest, and its recent EBIT of $50,385 and interest expense of $4,548 yield an interest coverage ratio of approximately 11.08. This ratio, calculated as EBIT divided by interest expense, indicates the fund can easily cover its debt obligations, even in a low-growth environment [1].

Risk Profile: Balancing Leverage and Market Volatility

Despite its strong earnings, HPS’s leverage and debt structure warrant caution. The fund’s total debt of $274.3 million as of the most recent quarter corresponds to a debt/equity ratio of 58.98% [1], which is moderate for a CEF but could amplify losses during market downturns. However, HPS’s historical probability of full share price recovery within 15 days post-ex-dividend is 88% [1], suggesting its portfolio is resilient to short-term volatility.

A critical risk lies in interest rate sensitivity. While HPS’s interest expense is low, rising rates could increase borrowing costs for future debt. Yet, the fund’s current leverage is fixed, and its 3.87% interest expense [4] remains manageable. Additionally, HPS’s focus on preserving capital aligns with its role as a stable income source, mitigating the need for aggressive debt expansion [2].

Strategic Considerations for Investors

For income-focused investors, HPS’s 8.93% yield is attractive, particularly given its consistent dividend history and strong earnings. However, the fund’s leverage and the broader economic climate necessitate a balanced approach. In a low-growth environment, companies with high payout ratios face heightened risks, but HPS’s moderate leverage and robust interest coverage ratio position it to navigate such conditions [5].

Investors should monitor HPS’s quarterly earnings and debt metrics, especially as interest rates stabilize or decline. A reduction in borrowing costs could further bolster the fund’s profitability, while disciplined leverage management will be key to sustaining dividends.

Conclusion

John Hancock Preferred Income Fund III exemplifies the potential of high-yield CEFs to deliver consistent income while managing risk through prudent leverage and earnings growth. Its $0.11 dividend appears sustainable, supported by strong net investment income and a favorable interest coverage ratio. However, investors must remain vigilant about macroeconomic shifts and the fund’s debt structure. In a low-growth world, HPS offers a compelling but not risk-free proposition for those seeking reliable income.

Source:
[1] John Hancock Preferred Income Fund III Announces $0.11 Dividend [https://www.ainvest.com/news/john-hancock-preferred-income-fund-iii-announces-0-11-dividend-market-impact-dividend-date-2508/]
[2] John Hancock Closed-End Funds Declare Monthly Distributions [https://www.johnhancock.com/about-us/newsroom/news/john-hancock-investment-management/2025/04/john-hancock-closed-end-funds-declare-monthly-distributions.html]
[3] John Hancock Closed-End Funds Release Earnings Data [https://www.johnhancock.com/about-us/newsroom/news/john-hancock-investment-management/2025/08/john-hancock-closed-end-funds-release-earnings-data.html]
[4] HPI JHancock Preferred Income Fund Summary [https://www.cefconnect.com/fund/HPI]
[5] Navigating the Risks: High Payout Ratios and Stable Dividend Income [https://www.breckinridge.com/insights/details/navigating-the-risks-high-payout-ratios-and-stable-dividend-income/]