INCLINE VILLAGE, Nev. — Given today’s low interest rates, investors have been buying dividend-paying stocks, which as a group have far outperformed the overall market. Utility stocks were last year’s best performers and are doing well again. I still like them and wouldn’t take profits just yet. Same for ATandamp;T and Verizon. Recently, investors have been buying preferred stocks. They, too, have done well. Maybe too well. Let’s take some profits.In an article last month I wrote about a recently issued “fixed-floater” from U.S. Bank, which pays 6 percent ($1.50 per year) then floats at a rate linked to LIBOR (yes, that LIBOR). The issue (USB’s preferred N) has risen more than two points since and is no longer a good bet. Here’s why: in 2017, when the issue begins to float and the dividend varies from quarter to quarter, the price will be very close to par. That means the current price is above par by an amount equal to more than 18 months of dividends, a premium that will certainly disappear. Is it a good value? I think not. For clients I’ve taken profits. I recently sold another preferred and one debt issue that were also no longer good bets. One was a 7 percent issue from JPMorgan (preferred J), which in all likelihood will be called soon, and another a 5.875 percent debt issue from GE Capital (symbol GED) that also may be called. They both worked out quite well. What now?We now have cash to invest. There are some adjustable-rate preferreds that are still attractive, all trading below par value. Once interest rates begin to rise, those preferreds will edge closer to par and at some point their quarterly dividends will also begin to increase. Emerging-market debt funds are also good bets. I recommend two. And there are some higher-yielding common stocks other than utilities that represent good value (clients own both Pfizer and General Electric). There is another choice, mainly to keep your powder dry and earn nothing while you wait for a better buying opportunity for income vehicles, preferreds included. The bottom line: With common stocks, if you pay too much for a solid company whose earnings will grow, the loss will be temporary. The next bull market will make it right. But pay too much for a preferred stock or bond and you’ll never recover. Some preferreds are at prices that leave virtually no upside potential and a guaranteed future capital loss. I had a few. Now I don’t. — David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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