THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.
~ Benjamin Graham
~ Benjamin Graham
Most of my recent posts have paid homage to my yield producing portfolios, but have, on balance, been mostly about growth plays (e.g. coal, oil, tech etc.) As a consequence, this post is dedicated to "yielders" and in particular how I hunt for them.
First , allow me to define "yielders". These are investments that fit into one of my "Baskerville" funds: that is, investments that yield on average at least 7% annually in dividends or interest. As stated many times before, I look for yielders that qualify for 15% tax treatment for my personal investments and place other "yielders' in my 401(k) or rollover IRA's avoiding those that are exposed to UBIT(generally master limited partnerships). Preferred stocks and exchange traded debt issues fit this profile to a tee. What are these and where can they be found?
Most investors are familiar with common stocks and bonds. Common stocks trade freely on stock exchanges. Some are "growth" stocks that generally do not pay dividends, the presumption being that the company can get a better rate of return on profits for the shareholders by reinvesting in the business in lieu of distributing those profits through dividends (e.g. Google, Apple---although combined these two sit on $90billion of uninvested cash!). The shareholder gains by an increase in share price---the sky being the limit. Income common stocks (e.g. utilities, tobacco companies, telecoms) can also increase in price without limit, but exist primarily for their steady income ("widow and orphan stocks"). The rate of return on common stocks depends on the share price. It is difficult to find common stocks in this market that pay above 6%. As a common stock owner one is the first to lose the investment should a company become insolvent.
Bonds are, in effect, mortgages. Bondholders lend money to corporations and in return receive a promise to repay the investment (usually in $1000 denominations) at the end of a set time period (e.g. 20 years) in exchange for a fixed payment of interest (e.g. 4%). Bonds are rated based upon safety (AAA being the highest---below BBB deemed "junk") and should the company become insolvent, bondholders have at least some claim to the value of the remaining assets. Bonds can be sold mid term, but generally not on an exchange; usually only through a broker. Bonds trade near there issued denomination price (e.g. $1000) with fluctations upward (premium) or downward (discount) based on the interest rate when issued and the rating.
Between common stocks and bonds are a host of "hybrid" securities that share characteristics of each. One hybrid is preferred stock. These are usually issued in $25 denominations and trade near that level depending on the "preferred" dividend rate. These are "preferred" because the dividends thereon must be paid before any common dividend can be paid, but only after all "interest" on bonds and exchange traded debt (discussed below) is paid. They have no claim on assets and are wiped out like common stock in case of insolvency. Since they trade flat (at or near $25 unless the company is in peril), they are primarily income plays. Some qualify for 15% tax treatment, others do not. Exchange traded debt, like preferred stock, generally trades flat at $25. Interest on these is taxed at marginal rates (not 15% qualified) and must be paid before any dividends are paid. They are "unsecured" and generally are wiped out in insolvency. These "hybrids" often are rated like bonds. An excellent discussion of these and other income securities can be found at
http://www.quantumonline.com/IncomeInvestments.cfm . Quantum on Line is an incredible source on all aspects of these types of investments.
Once educated on the basics, how do you find, compare and contrast? Every evening after watching Cramer and then Kudlow (not Kudrow), I head to the WSJ closing table for preferreds and exchange traded debt http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C . Check out this table--it lists the security, its price, its yield and its volume---WOW. If and when something catches my eye I do a deeper dive on Quantum on line and double check the company on Seeking Alpha http://seekingalpha.com/ , Morningside and Standard &Poors (S&P) which I receive as part of my Scottrade account. The offerings displayed on the WSJ table represent a wide range of return and risk. For example, one can find the exchange traded debt of GE (e.g. GEA, GER) which is rated AA and trades each day very near $25 and pays 6% annually. I buy these whenever they dip near $25 (I try not to pay more than $25 for preferreds or exchange traded debt because many are subject to redemption--buy back-- at any time at $25 plus accrued interest/dividends), and compare these to a "savings account". Clearly they bear more risk than an FDIC insured money market account, but, to me, that level of risk is worth the difference between 1% paid on money markets and 6% available on AA exchange traded debt. I do not over invest in any one of these securities, however, because they trade in small volumes (I like a minimum volume of 25,000 shares per day). If I keep my positions at 1000 shares or less on any issue, I can enter or exit instantaneously and without disrupting the bid/ask spread. You can tell from my XL sheet from last week that I own a vast array of these hybrids. My alltime favorite is AVF, the exchange traded debt of the huge insurer AIG. These are BBB rated paying a fixed amount of $1.925 per year--- 7.75% at its current price of 24.87 and not redeemable until 2012. I first bought AVF at $19 in June which means in my hands that $1.925 payment represents a 10% annual yield---and I have also achieved appreciation in principal of 30% ($24.87- 19= 5.47/19= 30%!!!) If only I had bought a ton more. I could have because AVF has an average daily volume of over 150,000 shares.
This week while perusing the WSJ closing table, I spied ELSpA which is a new preferred stock offered by Equity Life Style, an RV park real estate investment trust (REIT). I checked the company out at Seeking Alpha and S&P, found that it was rated a buy. I was especially encouraged because it had just raised its common dividend and had a long history of paying the common dividend (remember the common cannot be paid until the preferred dividend is paid). ELSpA pays a dividend of $2.085 per annum which at its current price of $24.83 equates to a yield of over 8%. I also bought the preferred of a premium hotel REIT, Pebblebrook (PEBpA) which I bought for slightly more than $25 because by its terms it cannot be redeemed until 2016 and it pays more than 8% as well. For tax reasons, I bought these in my 401k.
Lastly, I dove into two new issues by Ally Bank ("..you really do love your bank, don't you...."), formerly known as GMAC. This company was a train wreck a few years ago and was rescued to the tune of a $17 billion loan by the U.S Treasury which ended up being a 74% owner of the company. The issuance of ALLYpA is the repayment to the Treasury of the first $2.7 billion dollars of that mountain of debt. I bought it at $25 and may buy some more even though it is currently above $25 because it cannot be redeemed until 2016 and pays above 8%. ALLYpA is rated B3/CC (junk), but I figured the Treasury would not have issued it if the company was not strong enough to pay it---since the US still holds $14 billion more of its debt. For similar reasons, I bought ALLYpB which is a recent issue floated to repay GM for money it invested in old GMAC back when GM owned the company and before it changed its name to Ally. It too is rated B3/CC (junk), but pays a qualified dividend in excess of 8.5 %---well worth the risk to me in my personal portfolio.
There is a lot of information packed into this. I hope you enjoy/appreciate it.
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