John Hancock Preferred Income Fund III (HPS): A High-Yield Gem with Institutional Backing

In an era of rising interest rates and market volatility, income investors are increasingly drawn to vehicles that offer both attractive yields and stability. The John Hancock Preferred Income Fund III (HPS), currently yielding 9.26%, stands out as a compelling opportunity. Its dividend has remained unchanged at $0.11 per month since at least September 2023, while institutional investors—including major players like Invesco—are increasing allocations. This combination of historically elevated income and strategic institutional support suggests HPS is primed for a buying opportunity.

Dividend Stability Amid Elevated Yield

HPS's current yield of 9.26% is 1.54 standard deviations above its 5-year average, marking it as one of the highest-yielding preferred securities funds. This premium is driven by the fund's focus on preferred stocks and hybrid capital instruments, which often offer higher payouts than traditional bonds.

Key Data Points:
- Annual Dividend: $1.32 (unchanged since 2023).
- Yield Volatility: The yield has fluctuated between 7.8% (2021) and 9.8% (2023), but the payout itself has never wavered.
- Consistency Metric: The fund has maintained its monthly dividend for over six years, with the last cut occurring in 2019.

This stability is critical for income investors. While yields are high relative to history, the lack of dividend cuts—even during market stress—builds confidence in HPS's ability to sustain payouts.

Institutional Sentiment: A Contrarian Signal

While total institutional ownership in HPS dipped slightly in Q1 2025, a deeper look reveals strategic shifts by key players. Notably, Invesco, a major fund manager, increased its stake by 12% in the same quarter, now holding 4.2% of HPS's shares. This move suggests institutional buyers see value in HPS's income-generating capacity despite broader market caution.

Why This Matters:
- Contrarian Indicator: A dip in total ownership often coincides with oversold conditions, creating buying opportunities.
- Quality Ownership: Invesco's allocation signals confidence in HPS's portfolio management and risk controls.

Defensive Income Potential in Volatile Markets

Preferred securities, the core of HPS's holdings, offer a hybrid advantage: they rank senior to common stock in liquidation but subordinate to bonds, balancing risk and yield. In today's uncertain environment—marked by Fed rate hikes and geopolitical risks—this structure provides defensive income.

HPS's Edge:
- Diversification: The fund holds over 200 preferred securities across sectors like financials, utilities, and industrials, reducing concentration risk.
- Interest Rate Sensitivity: Preferred stocks typically outperform during periods of moderate rate rises, as their fixed coupons offset declining bond prices.

Investment Thesis and Risks

Case for Buying:
1. Income Priority: The 9.26% yield is unmatched among peers and offers a hedge against inflation.
2. Institutional Validation: Major allocators like Invesco are scaling up stakes, signaling a long-term bullish view.
3. Defensive Profile: Preferred securities thrive in volatile markets, making HPS a “recession-resistant” income tool.

Risks to Consider:
- Interest Rate Sensitivity: Prolonged rate hikes could pressure share prices, though dividends remain secure.
- Liquidity Constraints: Preferred securities can experience volatility in stressed markets, impacting HPS's NAV.

Conclusion: A Hold or Buy for Income Seekers

HPS's 9.26% yield, coupled with institutional support and a history of dividend stability, positions it as a compelling hold or buy for investors prioritizing income. While the fund isn't immune to market swings, its defensive tilt and high payout make it a standout option in a low-yield world.

Action Items:
- Investors with a >5-year horizon: Consider dollar-cost averaging into HPS to mitigate short-term price fluctuations.
- Income-focused portfolios: Pair HPS with low-volatility ETFs (e.g., SCHD) to balance risk.

In a market hungry for yield, HPS's blend of income and institutional credibility makes it a gem worth holding.