RNP: Navigating Rate Uncertainties to Secure Sustainable Income

In an era of shifting monetary policy and geopolitical volatility, income-focused investors face a critical question: How to balance yield with stability? The Cohen & Steers REIT and Preferred Income Fund (RNP) offers a compelling answer—if its distribution sustainability can withstand evolving interest rate environments.

The Case for RNP: Income Through Volatility

RNP has maintained a steady $0.136 monthly dividend since late 2024, supported by its managed distribution policy, which allows the fund to distribute long-term capital gains alongside income. However, recent distributions (e.g., April 2025) revealed a concerning shift: 12.7% of the payout was return of capital, signaling reliance on capital reserves to meet targets. While this is a common tactic in managed distribution plans, investors must scrutinize whether RNP’s portfolio can generate sufficient income or gains to avoid eroding principal long-term.

Interest Rates: A Double-Edged Sword

The Federal Reserve’s May 2025 decision to hold rates at 4.25%–4.50% reflects uncertainty over trade policies and inflation. Yet whispers of two rate cuts by year-end (as hinted by Fed Chair Powell) could be a tailwind for RNP’s core holdings:
1. REITs: Lower rates reduce borrowing costs, easing pressure on REITs to cover interest expenses. A soft landing for the U.S. economy would stabilize occupancy rates and property valuations.
2. Preferred Securities: These instruments thrive in a falling rate environment, as their fixed coupons become more attractive. RNP’s 20.3% allocation to preferred stocks could outperform bonds as yields compress.

However, the Fed’s caution underscores risks: Tariffs or supply chain disruptions could spike inflation, forcing the Fed to pause cuts. Investors should monitor 10-year Treasury yields—a rise above 3.5% might compress REIT valuations.

Risks Lurking in the Shadows

While RNP’s 30.55% leverage amplifies returns in rising markets, it also magnifies volatility. The fund’s 4.02% annual expense ratio (including 2.84% in interest alone) eats into net returns, especially if distributions rely on return of capital. Add to this exposure to foreign markets (e.g., 6.71% in non-U.S. fixed income) and below-investment-grade securities, and the risk profile becomes complex.

Why Act Now?

Despite these risks, three factors make RNP a strategic buy at its current $21.21 share price (May 2025):
1. Premium/Discount Dynamics: RNP trades at a 3.36% premium to NAV, but its historical 1-year average discount of -2.09% suggests potential upside if investor sentiment improves.
2. Managed Distribution Flexibility: The fund’s ability to tap capital gains (e.g., 29.5% long-term gains in April 2025) ensures steady payouts even if income falters.
3. Sector Resilience: RNP’s focus on data centers, healthcare, and telecom REITs aligns with secular growth trends, insulated from traditional office/retail sector declines.

The Bottom Line: A Calculated Bet on Income

RNP is not a risk-free play. Its high leverage, foreign exposure, and reliance on capital returns demand scrutiny. Yet, in a landscape of low yields and market instability, its 7.84% annualized distribution rate—backed by a disciplined portfolio and Fed-friendly rate outlook—positions it as a strategic income engine for portfolios.

For investors willing to navigate near-term uncertainty, RNP offers a rare opportunity: high income with asymmetric upside if the Fed delivers rate cuts. The time to act is now—before the window narrows.