Inflation persisting without end?

The concern has spread widely: across news outlets, fixed-income markets, and derivatives trading. They've all embraced the notion that intense price increases (along with elevated borrowing costs) will endure.

If you're like me, my fellow skeptic, you're taking note--but you also recognize something key in moments like this: When the majority anticipates one outcome, reality often diverges.

That's the focus of our discussion today. Because the indicators I'm tracking suggest the majority has it backward: It's deflation, not inflation, that deserves attention.

Declining rates, not climbing rates.

This gap has left some high-grade "preferred" (hint!) 7%+ dividends undervalued, offering contrarians an opening to acquire at lower prices and secure those yields. Let's explore further.

Inflation Consensus Runs Strong

Let's begin with the usual starting point for inflation and rate discussions: the Treasury market.

The 10-year note yield hovers just below 4.5%. The 30-year sits near 5%, stable for weeks now. This creates challenges for borrowers (including the government, already carrying heavy debt!).

Derivatives traders have aligned too. They anticipate the central bank holding rates steady for roughly six months. After that, a narrow majority expects a hike by January:

Source: CME Group

That forms a solid case for sustained higher rates, correct?

Yet here's the counterview, beginning with wage increases, which have moved steadily lower since the pandemic: down.

That's clearly deflationary--and April's 3.6% pace trailed the CPI. When wages lag prices, consumers respond by spending less. The remedy for elevated costs is indeed elevated costs!

Then consider AI, acting as a drag on employment. An April 2026 Goldman Sachs analysis found AI reduced monthly job additions by 16,000 in the US over the prior year. The precise figures matter less than the broader effect: discussions of automation prompt caution in spending.

Iran? Neither side can sustain prolonged tension. Eventually the waterway will clear. Oil supplies will resume--easing price pressures in turn.

And remember, Kevin Warsh is joining the Fed. The current administration seeks rate reductions, and he will likely pursue them once conditions allow.

Despite these factors, markets still price in lasting inflation. Let's examine two 7%+ paying funds--one with an expanding distribution.

Inflation Concerns Leave These "Preferred" 7%+ Dividends Discounted

We recently noted corporate-bond closed-end funds as relevant here, and they remain so. Now consider another undervalued area of CEFs: preferred shares.

Preferreds function as stock-bond blends. They trade on exchanges like equities and distribute income. Yet like bonds, they often hover near a set value, with generally fixed payments.

Those payments also tend to exceed common-stock dividends--often by double or triple.

Like bonds, preferreds--or the CEFs holding them--face overselling now. Bond yields have climbed with inflation concerns, but prices have dropped (as prices and yields move oppositely).

With preferred funds, however, the discounts have grown excessive. That signals opportunity.

A "Hybrid" Fund at 12% Below Value (Yielding 7.7%)

The 7.7%-yielding John Hancock Premium Dividend Fund (PDT) offers a strong entry, as a "hybrid" allocating 43% to common stocks, 30% to preferreds, and 26% to bonds plus other income assets.

This mix has delivered results, with PDT's equities driving total returns (shown in purple) ahead of the preferred benchmark iShares Preferred and Income Securities ETF (PFF) over the past decade:

PDT's "Hybrid" Approach Adds Lift

PDT further enhances performance (and thus dividends plus preferred exposure) via leverage, around 34% of assets.

Many investors might avoid this amid current rates. Yet we view it as an advantage: As rates ease, PDT's borrowing expenses decline--while the drop lifts its fixed-income holdings' value.

Meanwhile, the fund trades at a 12.1% discount to net asset value (the underlying portfolio worth) as of this writing. The gap has widened with the "inflation forever" view this year:

PDT Signals a Clear Contrarian Entry

This stands out given PDT's typical trading near par over five years. Such a wide discount is uncommon, and unlikely to persist with the steady 7.6% monthly yield.

This 8.6% Dividend Continues Expanding

The Flaherty & Crumrine Dynamic Preferred & Income Fund (DFP) offers a more focused preferred play than PDT, with 51% in those shares as of February 28. The balance includes 45% bonds and roughly 4% convertibles plus cash.

Even without PDT's equity boost, DFP (in purple) has outperformed its benchmark ETF, PFF, over ten years by a similar margin.

DFP Outperforms Its Benchmark

This track record highlights why experienced preferred managers add value over automation. The preferred space is limited, and relationships matter for accessing new issues. F&C, with over 40 years in fixed income, maintains strong connections.

The results back its 8.6% monthly dividend, which has increased since emerging from 2022's inflation surge.

Management appears to see past the rate concerns: It issued a special dividend late last year and raised the regular payout again recently:

DFP's Payout Expands--Ignoring the Alarm

Source: Income Calendar

This benefits holders, but the real aim is likely closing the fund's discount, now at 8.3% and stagnant. Special and higher payouts help signal strength to attract buyers.

DFP's Discount Remains Flat (Temporarily)

My outlook? Success lies ahead--and the high, growing monthly income will support the discount while investors receive the rising stream.

Later, as the inflation alarm fades, existing fixed-income values will rise, lifting DFP's portfolio and narrowing the discount toward par, as seen before 2022.

An 8.6% Yield Works ... Yet Trails This 11% Giant

My top idea amid this exaggerated inflation concern delivers far more than DFP's 8.6% stream.

This fund--a key holding from my Contrarian Income Report service--yields 11% currently. Its monthly distribution has held steady, with two specials plus a regular increase added.

I expect it to advance with our preferred funds once markets accept the inflation outlook shift. Until then, the strong 11% monthly income continues.

I've compiled more on this overlooked income opportunity in a special note available here. You'll also receive a free report with the fund's details, ticker, and full portfolio review.

Now is the moment for this 11% payer. Delaying means forgoing more monthly income.

Further DFP Research:

Warren Buffett Dividend Stocks
Dividend Growth Stocks: 25 Aristocrats
Future Dividend Aristocrats: Close Contenders

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.