John Hancock Preferred Income Fund II: Dividend Discipline in a Volatile Market

In an era of economic uncertainty, investors seeking steady income often turn to closed-end funds like the John Hancock Preferred Income Fund II (HPF). Known for its unwavering monthly distribution of $0.1235 per share since 2023, HPF has become a symbol of consistency in a market where many high-yield vehicles have faltered. But as interest rates fluctuate and economic headwinds persist, the question remains: Can this dividend policy endure, and is the fund's current yield attractive enough to warrant investment?

The Dividend Track Record: A Model of Discipline

HPF's dividend history since 2023 paints a picture of remarkable stability. Despite market volatility, the fund has adhered to its $0.1235/month payout, with no cuts or reductions even as the Federal Reserve hiked rates aggressively. As of June 2025, the fund's annualized distribution rate stands at 9.37% (based on its June 30 market price of $15.81), far exceeding the 3.5% yield on the S&P 500 and rivaling the returns of many high-yield bonds.

This consistency stems from HPF's managed distribution plan (HTD Plan), which guarantees monthly payments. However, investors must note that distributions may include return of capital (ROC)—a portion of invested principal—rather than purely income or gains. While ROC does not immediately reduce NAV, repeated use can erode long-term value if not offset by capital appreciation.

NAV and Market Context: A Premium Price, but What's Under the Hood?

As of June 6, 2025, HPF's NAV was $15.92, with a market price of $16.42—a 3.14% premium to NAV. This premium reflects investor confidence in the fund's ability to sustain its distribution, but it also means new buyers pay a slight premium to NAV.

Dig deeper into the fund's portfolio: HPF invests primarily in preferred stocks and hybrid securities, which typically offer higher yields than common equities but rank lower in priority during defaults. The fund's effective leverage of 37.62% amplifies returns in rising markets but increases risk in downturns.

The June 2025 Dividend Discrepancy: A Temporary Blip or Red Flag?

A minor inconsistency emerged in June 2025, when a forward yield of 9.36% was reported with a $0.12 payout, conflicting with the official $0.1235 declaration. This discrepancy was likely due to rounding differences or a temporary data error, as subsequent announcements confirmed the $0.1235 rate. Investors should remain vigilant but not overreact to minor anomalies in quoted yields.

Sustainability Risks and Opportunities

While HPF's dividend discipline is commendable, three factors could test its sustainability:
1. Rate Environment: Preferred stocks are sensitive to interest rate changes. A prolonged period of high rates could compress valuations, squeezing yields.
2. Credit Quality: The fund holds lower-rated securities (BBB- and below), which may struggle if economic growth slows.
3. Leverage Costs: Borrowing expenses could rise if short-term rates remain elevated, squeezing profit margins.

However, HPF's diversified portfolio—spanning financials, utilities, and energy sectors—buffers against sector-specific risks. Its 12-month trailing NAV return of 9.78% (as of July 2024) also outperforms many fixed-income alternatives, despite lagging the category average.

Is HPF Worth the Premium?

At a 9.37% yield, HPF remains an attractive option for income seekers, especially those willing to accept moderate volatility. The 3.14% premium to NAV is justified if the fund can grow NAV over time. However, investors should:
- Monitor ROC disclosures: Excessive ROC (over 10% of distributions) signals trouble.
- Track leverage costs: Rising interest expenses could pressure payouts.
- Diversify within a portfolio: Allocate no more than 10–15% of income-focused assets to such leveraged funds.

Final Verdict: A High-Yield Pick for Patient Investors

John Hancock Preferred Income Fund II is not a “set it and forget it” investment. Its managed distribution plan and preferred stock focus create a high-yield stream, but investors must weigh the risks of leverage, credit exposure, and ROC. For those with a long-term horizon and a tolerance for volatility, HPF's 9.37% yield offers compelling income potential. Just remember: In this fund, consistency is a virtue—but not a guarantee.