John Hancock Preferred Income Funds: High-Yield Dividends Under Pressure—A Tax and Risk Analysis

The John Hancock Preferred Income Fund (HPI) and its sister fund, John Hancock Preferred Income Fund II (HPF), have maintained their monthly dividend of $0.1235 per share amid volatile markets, delivering an annualized yield of 9.27% and 9.37%, respectively, as of June 30, 2025. This consistency has drawn investors seeking income in a low-yield world, but questions linger about whether the payouts are sustainable—and what tax implications lurk beneath the surface.

Sustainability: A High-Wire Act

The funds' ability to sustain distributions hinges on two critical factors: the net asset value (NAV) and leverage. While the June 2025 NAV isn't disclosed, historical data reveals cause for caution. As of September 2024, HPI's NAV was $17.02, while its market price in June 2025 was $15.99—a 6.5% discount. This suggests the market is pricing in risks such as rising interest rates or declining NAVs.

Both funds use 36-38% leverage, amplifying returns in rising NAV environments but magnifying losses when markets turn. With the Federal Reserve's rate hikes and credit spreads widening, the risk of NAV erosion grows. Compounding the pressure: expense ratios of 4.37%, which are nearly double the average for preferred stock funds.

Tax Implications: A Hidden Cost

Investors often overlook the tax consequences of preferred stock funds. Distributions here may include return of capital (ROC), which reduces your cost basis and defers tax liability. For instance, if 10% of HPI's $0.1235 payout is ROC, an investor's cost basis declines, meaning future gains—or even eventual losses—could face higher taxes.

Worse, if NAV declines further, ROC percentages could rise. A falling NAV means more of each payout might chip away at principal, turning “income” into a tax trap.

The Bottom Line: A High-Reward, High-Risk Trade

For income investors, HPI and HPF are tempting. Their yields outpace 10-year Treasuries by a wide margin, and the funds have avoided cuts since 2019. But the risks are stark:

1. Interest Rate Sensitivity: Preferred stocks typically decline when rates rise. With the Fed's terminal rate at 5.5%, further hikes or prolonged high rates could pressure prices.
2. Leverage Loopholes: If NAVs fall below debt levels, distributions could be slashed to preserve capital.
3. Tax Headwinds: ROC components require meticulous tracking to avoid future tax penalties.

Investment Strategy: Proceed with Caution

• Hold if: You're a long-term income investor with a >5-year horizon, willing to tolerate volatility and monitor tax implications.
• Avoid if: You're risk-averse or need stable NAVs. The funds' expense ratios and leverage make them a better bet in rising NAV environments.

Consider pairing HPI/HPF with low-volatility ETFs (e.g., XLU utilities) to balance risk. Better yet, dollar-cost average into the funds to mitigate short-term price swings.

In short, these funds are a high-octane play for income hunters—but the engine runs hot. Investors must weigh the thrill of double-digit yields against the real risks of leverage, taxes, and shifting rates.

Final call: For the bold, HPI and HPF remain compelling. But proceed with eyes wide open.