Market Pulse: Good news for savers
A strategy many investment advisors follow is to determine the proper allocation between stocks and bonds and then periodically adjust the portfolio to keep it. I’m not a fan. The recent rapid rise in interest rates makes fixed-income instruments increasingly attractive. It’s time to lock in higher yields.
A few years ago interest rates were near zero and bond yields had nowhere to go but up. I even wrote that Treasury funds were “almost guaranteed losers.” Yields took their time to rise but now they have arrived. Savers can lock in a 6% yield on an investment grade bond or preferred stock. Or they can get 8 to 10% by taking on more risk. Given the risk of a recession and instability of the banking industry, investment grade securities make the most sense. Here are a few:
Axis Capital offers a 5.50% Preferred ‘E’ share (AXS-E). This security pays $1.38 annually. That’s a yield of 6.6% given its current price of $20.8. S&P gives it a BBB rating and it pays qualified dividends.
RenaissanceRe Holdings has a Series G Preferred (RNR-G). This security pays $1.05 per year, which gives it a yield of 6.5% given its current price of $16.4. Like the previous security, this preferred is investment grade with a BBB rating and pays qualified dividends.
There are also floating rate securities whose yield rises when central banks raise rates. U.S. Bancorp offers a Floating Rate Series B Preferred (USB-H). The floating rate is 0.60% above three-month Libor (Libor is currently 5%). At its current price of $19.6 this security yields 6.2%, is rated BBB+ and pays qualified dividends.
Here’s a special situation: Annaly Capital Management 6.95% Series ‘F’ (NLY-F). The rate on this security is Libor plus 5%. At its current price of $25 it yields just under 10%. When this security was issued I doubt that management ever thought rates would be this high so they may call the security at its $25 par. Because of a potential or even partial call, the downside risk is limited even though it is unrated. Only buy below $25 though.
Of course a money market fund now yielding 4.3% is always an option. But that yield will fall when inflation falls or if the economy enters a recession. Instead, savers should lock in today’s rates. It’s a good time to be an income investor. I haven’t said that in many years.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com 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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