Nuveen Quality Preferred Income Fund 2 (JPS)

[Wildbilly]

It Is Time To Swap Your Preferred Stock ETF Into This Preferred Stock Closed-End Fund
Jun 12 2013, 10:09  |  about: JTP, includes: JHP, JPI, JPS, PFF
Disclosure: I am long JTP, JPI, JPS. (More...)

One of the most popular exchange-traded funds is the iShares S&P US Preferred Stock Index (PFF). It's net asset value is about $11.8 Billion with a yield of 5.78%.

The Nuveen Quality Preferred Income Fund (JTP) is a closed-end fund that seeks a high level of current income by investing at least 80% of its net assets in preferred securities and up to 20% in debt securities, including convertible debt securities and convertible preferred stock. All of its assets at the time of investment are investment grade quality (BBB/Baa or better), but some securities may subsequently fall in rating.


Both of these securities have fallen in price over the last few weeks as the 10 year bond yield has increased. But I believe that JTP is now a much better buy than PFF. For someone who is holding PFF at a loss in a taxable account, this is a good time to swap the PFF for JTP, realizing the tax loss. I would also recommend this trade in an IRA account, but there is no tax advantage in that case.

Since PFF is an exchange-traded fund, an arbitrage mechanism normally causes it to trade close to its net asset value. Currently the discount to NAV is -0.1%.

JTP is currently selling at a discount to NAV of -8.62% compared to the 6 month average discount of -2.81%. The 1-Year Z-Statistic is -3.02. This means the current discount to net asset value is three standard deviations below the mean. One year standard deviation for JTP's discount is 2.13%, so if JTP merely returns to its normal discount, you could see a 6% excess return relative to the NAV return.

What is the likelihood JTP can raise its monthly dividend?

To determine this, I look at the Average Earnings/Current Dividend Ratio. This ratio tells you whether or not a fund is earning its current dividend. If the value is well above 100%, it means the fund can easily afford to raise its distribution rate.

For JTP, the average earnings as of May 31 is $0.0536, which is higher than the recently monthly payout of $0.05. The Average Earnings/Distribution ratio is now 107.20% which is one of the highest ratios for Nuveen fixed income CEFs. This means that JTP may soon be increasing its monthly distribution.

There is also a high positive value for "Undistributed Net Investment Income" or UNII. This is the life-to-date balance of a fund's net investment income less distributions. For JTP, the UNII per share is +0.1536 which provides a nice cushion of more than three months of dividends to protect the monthly payout.

JTP has several "sister" funds at Nuveen that also invest in preferred securities - JPS, JHP and JPI. These funds also sell at attractive discounts, but have somewhat lower Average Earnings/Distribution ratios and UNII per share:

Continued in following link.

http://seekingalpha.com/article/1496712-it-is-time-to-swap-your-preferred-stock-etf-into-this-preferred-stock-closed-end-fund?source=yahoo