By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel consensus is bearish, warning against investing in preferred CEFs like PDT and DFP due to high leverage, NAV compression risks, and uncertainty around rate cuts and credit quality.
Risk: High leverage (34% in PDT) and sensitivity to rate hikes and credit spread widening
Opportunity: None identified
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Inflation forever?
The fear has taken root seemingly everywhere: the media, the bond market, the futures market. They've all bought into the idea that scorching price hikes (and high interest rates) are here to stay.
If you're like me, my fellow contrarian, you're paying attention--but you also know something else about times like these: When everyone expects something to happen, something else usually does.
That's what I want to talk to you about today. Because all the data I'm watching tells me the crowd is wrong: It's deflation, not inflation they should be focused on.
Falling rates, not rising rates.
This disconnect has put some top-quality "preferred" (hint!) 7%+ dividends on the outs, giving contrarians a chance to buy cheap and "lock in" their high yields. Let's get into it.
Inflation "Groupthink" Runs Deep
Let's start where everyone looks when talking inflation and rates: the bond market.
The 10-year Treasury yield sits just under 4.5%. The 30-year yield is right around 5%, where it's been for weeks. That's a headache for anybody looking to borrow money (including Uncle Sam, with his already bloated credit card!).
Futures traders, too, have bought in. They see the Fed keeping rates where they are for the next six months or so. Then, by a slim majority, a rate hike in January:
Source: CME Group
That looks like a pretty airtight argument for higher rates, right?
Except, well, here's the other side of things, starting with wage growth, which has been trending one way since the pandemic: down.
That's clearly deflationary--and April's rate of 3.6% fell behind the CPI. When that happens, people do one thing: cut back. The cure for high prices really is high prices!
Then there's AI, which is an anchor on hiring. According to an April 2026 Goldman Sachs study, AI slowed monthly payroll growth by 16,000 jobs in the US over the preceding year. But the numbers don't really matter here. Just talking about replacing workers with robots will cause some folks to sit on their wallets.
Iran? Neither it nor the US can afford to let this situation fester. Sooner or later, the strait will reopen. The oil will flow--and inflation will ease when it does.
And let's not forget, we've got Kevin Warsh settling in at the Fed. The administration wants him to cut rates, and he'll likely do so as soon as he can justify it.
But even with all this, investors still think inflation is here for the long haul. Let's call that out with two 7%+ paying funds--including one with a payout that's growing.
Inflation Fears Put These "Preferred" 7%+ Dividends on Sale
A couple weeks ago, we highlighted corporate-bond closed-end funds (CEFs) as timely plays on this situation, and they still are. Now let's peer into another discounted corner of CEF-land: preferred shares.
The best way to think about preferreds is as stock/bond hybrids. They trade like a stock, and they pay dividends. But like a bond, they tend to trade around a par value, and the payout is usually fixed.
One more thing about those payouts: They're typically a lot higher than those on a company's common shares--regularly two or three times higher.
And like bonds, preferreds--or CEFs that hold them--are oversold today. That's because while bond yields have risen with inflation fears, their prices have fallen (because prices move inversely to yields).
But as is the case with bond CEFs, these discounts have gone too far with preferred funds. That's our cue.
A "Hybrid" Fund Trading for 12% Off (and Yielding 7.7%)
The 7.7%-yielding John Hancock Premium Dividend Fund (PDT) is a good place to start with preferreds because it's a "hybrid," investing 43% of its assets in common stocks, 30% in preferreds and 26% in bonds and other income securities.
That strategy has paid off, with the PDT's common shares helping power the fund's total return (in purple below) past the preferred-stock benchmark iShares Preferred and Income Securities ETF (PFF) in the last decade:
PDT's "Hybrid" Portfolio Gives It a Boost
PDT also boosts its returns (and by extension an investor's dividends and preferred-stock exposure) with leverage, to the tune of around 34% of its portfolio.
That would send many vanilla investors to the exits, with today's interest rates. But we know this is a feature, not a bug: As rates fall, PDT's borrowing costs will, too--as that rate decline boosts the value of its fixed-income portfolio.
Meantime, this smartly built fund is available at a 12.1% discount to net asset value (NAV, or the value of its underlying portfolio) as I write this. You can see that discount widening as the "inflation forever" mindset took hold this year:
PDT Gives Off a Clear Contrarian Buy Signal
That's a particularly sweet deal when you consider that PDT has, on average, traded around par over the last five years. A discount this deep is rare, and I don't expect it to last in light of the steady 7.6%-yielding (and monthly paid) dividend PDT offers.
This 8.6% Dividend Is On a Growth Tear
The Flaherty & Crumrine Dynamic Preferred & Income Fund (DFP) is a "purer" play on preferreds than PDT, with 51% of its portfolio in these shares as of February 28. The rest is 45% bonds and around 4% convertible bonds and cash.
But even without PDT's common-stock "afterburner," DFP (in purple below) has still cleanly beaten its benchmark ETF, PFF, over the last decade, by nearly the same margin.
DFP Easily Beats Its Benchmark
This performance shows why "human" preferred-fund managers won't be replaced by AI. The preferred market is small, and personal connections are key to getting in on the hottest new issues. And F&C, which has been in fixed income for more than 40 years, has one of the deepest contact lists out there.
The fund's strong return also supports its 8.6% dividend (again paid monthly), which has grown since DFP emerged from 2022's inflation spike.
Management clearly sees through the current rate scare: It delivered a special dividend at the end of last year and hiked the regular payout again with the latest payment:
DFP's Dividend Grows--and Shrugs Off the Fearmongers
Source: Income Calendar
That's great for DFP shareholders, but what management is likely really trying to do here is narrow the fund's discount, which has slumped to 8.3% in the last few years and has been stuck there since. Special payouts and dividend hikes are great ways for them to signal confidence and draw more buyers in.
DFP's Discount Is Spinning Its Wheels (for Now)
My prediction? They'll be successful--and the fund's high, and growing, monthly payout will put a floor under DFP's discount and let investors pocket the fund's growing income stream in peace.
Then, when today's inflation scare ebbs, yields on existing fixed-income assets will slide, increasing the value of DFP's portfolio and pushing its discount back toward par, where it was before the 2022 mess.
An 8.6% Payout Is Fine ... But It Pales Next to This 11% Monster
My top play on this overdone inflation panic sports a payout far bigger than even DFP's 8.6% income stream.
This fund--a top buy from the portfolio of my Contrarian Income Report service--yields 11% now. And its monthly payout has been rock-solid--with management sweetening the deal with two special dividends and a hike on top of that.
I expect this one to surge alongside our two preferred funds when investors see reason on the inflation argument. While we wait, we'll collect that stellar 11% dividend, in the form of steady payouts every month.
I've put further details on this unloved (for now) income play into a special bulletin you can read here. You'll also get a free Special Report revealing this fund's name, ticker, and my complete analysis of its portfolio and strategy.
The time to buy this 11% payer is now. The longer you wait, the more monthly income you leave on the table.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Preferred-stock CEF discounts reflect legitimate duration risk, not irrational inflation panic—and the article's deflation case is built on one weak month of wage data and speculative geopolitical scenarios, not structural evidence."
The article's deflationary thesis rests on wage growth trailing CPI and AI-driven hiring weakness, but both are weak anchors. Wage growth at 3.6% YoY still exceeds pre-pandemic norms; April's miss vs. CPI was one month, not a trend. The 'Iran strait reopening = oil flows = deflation' logic is speculative. More critically: the author conflates a *preferred-stock discount* (real) with imminent rate cuts (unproven). PDT and DFP trade cheap because *duration risk is real*—if rates stay elevated or rise further, NAV compression continues regardless of leverage benefits. The unlisted 11% yielder is a sales funnel, not analysis.
If the Fed holds rates at 5.25%+ through 2025 due to sticky services inflation or geopolitical oil shocks, preferred-fund NAVs compress further, and the 12% discount on PDT becomes 20%+ before any rebound—turning a 'cheap' entry into a value trap.
"Leverage plus sticky inflation risks can keep discounts wide and NAVs under pressure even if the 7-8% yields hold."
The article bets that inflation fears have oversold preferred CEFs like PDT and DFP, creating 7-8.6% yields at deep discounts that will close as rates fall. Yet it underplays how these leveraged vehicles (PDT at ~34%) behave if the Fed holds or hikes further into 2025. Wage growth at 3.6% still exceeds core inflation in some measures, and oil supply shocks from the Strait of Hormuz remain unresolved. Historical data shows preferred CEF discounts can stay wide for years when Treasury yields stay above 4%. The 11% teaser fund is undisclosed, preventing verification of its claimed resilience.
Persistent rate cuts could still compress borrowing costs fast enough for PDT's leverage to boost NAV and close the 12% discount within two quarters, validating the contrarian call.
"The deep discounts on these CEFs offer a tactical entry point, but the thesis relies on a deflationary pivot that is currently unsupported by core CPI and labor market resilience."
The article’s premise—that we are entering a deflationary environment—is a dangerous oversimplification. While wage growth is softening, structural inflation drivers like de-globalization, energy transition costs, and fiscal deficits remain persistent. The author correctly identifies that Closed-End Funds (CEFs) like PDT and DFP are trading at attractive discounts to NAV, but they ignore the 'leverage trap.' With 34% leverage in PDT, if the Fed keeps rates 'higher for longer' to combat sticky core services inflation, interest expenses will erode NAV further, regardless of the yield. Betting on a rapid rate pivot is a high-conviction trade that ignores the reality of the current Treasury term premium.
If the author is right about a sudden, sharp economic contraction, the credit spreads on the underlying corporate bonds in these portfolios will blow out, leading to NAV destruction that far outweighs any gains from falling interest rates.
"High-yield preferreds offer appealing income, but leverage, discount volatility, and credit risk make them risky in a sustained rate or credit stress environment."
The contrarian thesis hinges on a deflationary backdrop and a chase for high-yield 'hybrid' preferreds. Yet the article downplays material risks: leverage in PDT and similar funds can magnify losses if NAVs slip or liquidity dries up; discounts to NAV can widen in risk-off spells or if issuer credit deteriorates, erasing upside from higher distributions; and these securities remain sensitive to spread widening and macro shocks even if rates pause. The touted 11% payer may look compelling, but its sustainability likely depends on recurring specials and favorable credit conditions, which are not guaranteed in a stress scenario.
If rates stay higher for longer or credit quality worsens, the discounts to NAV could widen further and distribution cuts become likely, offsetting or overwhelming any price gains from a slower inflation regime.
"PDT's leverage cost at current rates eats most of the yield advantage, making the bull case entirely dependent on near-term Fed cuts that remain unproven."
Everyone flags leverage risk correctly, but nobody quantifies the actual trigger. PDT's 34% leverage costs ~2.3% annually at current rates. If rates hold 5.25%+ through 2025, that drag alone erodes 230bps of the 7% yield advantage—leaving 470bps real return. That's not compelling for the NAV compression risk Gemini and ChatGPT highlight. The deflationary case needs *rate cuts* to work, not just 'cheaper preferreds.' Without Fed pivot, this is a yield trap, not a value opportunity.
"Fiscal deficits could sustain high Treasury yields, blocking PDT discount closure despite any Fed cuts."
Claude correctly tallies PDT's 2.3% leverage cost but overlooks how a cooling in core services could let the Fed cut without broad deflation. The missing connection is Grok and Gemini's points on yields above 4%: persistent fiscal deficits could keep the 10-year elevated, preventing discount closure even after 50bps in cuts. This fiscal-rate linkage makes the 11% fund's resilience untestable.
"The primary risk to preferred CEFs during a downturn is credit spread widening and potential defaults, not just the interest rate sensitivity of the leverage."
Claude and Grok are fixated on the Fed, but they’re ignoring the underlying credit quality of the preferred issuers. If we hit a recession, it’s not just the leverage cost (230bps) that kills NAV—it’s the credit spread widening on the underlying financials. These funds aren't just interest-rate proxies; they are credit-sensitive. If default risk spikes, the 12% discount to NAV is irrelevant. The real risk is a credit event, not just 'higher for longer' rates.
"Credit/liquidity shocks could overwhelm the carry and drag NAVs lower even if rates pause or pivot later."
Claude’s math assumes leverage drag stays at ~2.3% and that a Fed pivot will close the discount. In a recession, credit spreads and liquidity can widen abruptly, accelerating NAV compression beyond the rate-sensitivity you outlined. The overlooked risk isn’t only 'higher for longer' rates but issuer-credit deterioration and potential liquidity stress in CEFs with 34% leverage. That could erase the 7% yield advantage even before pivots materialize.
The panel consensus is bearish, warning against investing in preferred CEFs like PDT and DFP due to high leverage, NAV compression risks, and uncertainty around rate cuts and credit quality.
None identified
High leverage (34% in PDT) and sensitivity to rate hikes and credit spread widening