Market Pulse: Investing for income and stability
Interest rates are plunging making it ever harder for investors to receive an adequate income from their investments. Worse still, many people can’t accept today’s stock volatility or may have even lost faith in the market.
There’s still a solution. For my clients, preferred stocks and exchange-traded debt instruments play an important role.
These outside-the-box securities are often overlooked because they are not liquid enough for large institutional investors. Plus, brokers don’t follow those securities since people “invest” in them rather than trade short-term. That is all to our advantage.
Axis Capital Holdings, an insurance company, has a preferred “E” issue (AXS.E) that is rated BBB by S&P. It trades at $25.72 with a yield of 5.35%. It pays qualified dividends that for most people are taxed at the 15% rate. This issue can be called in November 2021 but barring a call it will never mature.
I bought the Annaly Capital Management 6.95% Fixed/Float ‘F’ (NLY.F) when it was first issued. It remains a great value and yields just under 6.7%, can’t be called until 2022, and in 2022 its yield will float at 4.993% plus three-month LIBOR. That’s great if rates rise and is good even if they don’t. This issue is very liquid.
Now to exchange-traded debt. Prospect Capital’s 6.25% Note (PBB) is an investment-grade security that matures in 2024. If you hold this security to maturity then you eliminate the risk of rising interest rates, not that rising rates is a worry. PBB trades just over par with a yield of 6% and is rated BBB-.
Finally, Ares Capital (ARCC) is an equity that income investors should consider holding. It is the largest Business Development Company. As a BDC, it has to pay at least 90% of its income to shareholders. That’s why Ares Capital and other BDCs are popular with income investors.
Ares Capital yields 8.5%. Since this is not a fixed-income instrument, this security carries more risk that the others listed above, but most people will find its price fluctuation to be in an acceptable range.
Some very smart analysts say the bond market is in a bubble, but they are usually referring to the Treasury market. I have no interest in Treasuries yielding 1.5%. The securities listed above are appropriate for investors who want to receive income from their investments and they are appropriate for those who can’t stomach the volatility of the stock market.
Each of these investments plays an important role in my client portfolios.
David Vomund is an Incline Village-based fee-only money manager. 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.