Protect Your Portfolio with Preferred CEFs Amid Tariff Turbulence

The markets are in a pickle! Tariffs are back in the headlines, and corporate profit margins—the lifeblood of earnings—are under the microscope. But here's the deal: Not all companies are created equal. Some have the financial armor to weather tariff storms, while others crumble. And guess what? Even if tariffs do hit, there's a sneaky defensive play that's flying under the radar: preferred stock closed-end funds (CEFs). These are the unsung heroes of income investing, offering fat yields and discounts in a low-rate world. Let me break it down.

Profit Margins: The Cushion Against Tariffs

First, let's talk about the elephant in the room: profit margins. The Federal Reserve's data shows that U.S. corporate profits after tax (adjusted for inventory and capital consumption) have held up remarkably well through 2024. Take the manufacturing sector, which saw margins stabilize at 6.3% in Q3 2024—up from 5.8% in 2020—thanks to pricing power and cost discipline. Meanwhile, retail trade margins dipped slightly to 3.2% in Q4 2024 but remain resilient.

But here's the key: companies with robust margins can absorb tariff impacts. If a 10% tariff hits, a firm with a 10% margin can either raise prices, cut costs, or eat the hit without cratering. That's why sectors like tech (with margins around 12%) or pharmaceuticals (15%+) have the buffer to survive trade wars. Meanwhile, low-margin industries like airlines or retail could get crushed.

Preferred CEFs: Yield Powerhouses in a Defensive Stance

Now, onto the defensive play: preferred stock closed-end funds. These funds pool preferred stocks—hybrid securities that act like bonds but with equity upside. They're perfect for this environment because:
1. Yield Advantage: Preferreds typically pay 5-7%+ dividends, far above the 3.5% average for the S&P 500.
2. Discount to NAV: Funds like LDP (PIMCO Dynamic Credit Opportunities), FFC (Federated Hermes Capital & Income), and NPFD (Nuveen Preferred & Income Opportunities) often trade at 5-10% discounts to their net asset value, giving you a safety cushion.
3. Low Volatility: Preferred stocks are less sensitive to equity swings. When tariffs spook stocks, investors flee to safer income assets—driving up demand for preferreds.

Take LDP as Exhibit A: It currently yields ~6.2% and trades at a 6% discount to NAV. If the discount narrows, your gains double—capital appreciation and income! Meanwhile, NPFD focuses on floating-rate preferreds, which protect against rising rates.

The Tariff-Turned Bond Rally: Why Preferreds Shine

Here's the inverse relationship magic: when tariffs roil equities, preferred stock demand surges. Think of it as the “fear trade.” Investors bail on volatile stocks and plow into safer, income-producing assets. This dynamic is why preferred CEFs often outperform in choppy markets.

In 2024, when tariff fears spiked, preferred CEFs like FFC and NPFD saw their discounts shrink as demand soared. This isn't just theory—it's what happened when China-U.S. trade tensions flared last year.

Action Plan: Build Your Defensive Shield

1. Buy the dips: When the market sells off due to tariff headlines, scoop up LDP, FFC, or NPFD. Their discounts usually widen temporarily, giving you a better entry.
   
2. Diversify with a twist: Pair these CEFs with high-quality bonds or dividend stocks in tariff-resistant sectors (e.g., healthcare, tech).
3. Hold for income: These funds are buy-and-hold plays. Their monthly/quarterly distributions provide steady cash flow, even if the market tanks.

Bottom Line: Don't Panic—Profit from the Panic

Tariffs are a fact of life now, but that doesn't mean you have to lose sleep—or money. By focusing on companies with strong profit margins and pairing them with preferred CEFs, you're hedging against volatility while collecting juicy yields. Remember: In a world of uncertainty, the best defense is a yield offense!

Stay ahead of the curve—keep an eye on Q2 2025 profit margin reports (when they drop) to confirm which sectors are truly resilient. Until then, load up on those discounted preferred funds.

Action Alert: Buy LDP on a dip below $12/share and FFC on a pullback to $10.50. These are no-brainers!

Data as of Q3 2024. Past performance does not guarantee future results. Consult your financial advisor before making investment decisions.