Market Pulse: On tradable fixed income
October 10, 2018
Over the years I have often recommended in this column preferred stocks and exchange-traded debt to generate more income than common stocks and ETFs with acceptable risks. They have worked out very well.
The issues have retreated a bit recently as interest rates have ticked higher, but not enough to offset the dividend and interest income. If anything, they are even more attractive.
A preferred stock is a "hybrid" security with characteristics of both stocks and bonds. Here are a few of my favorites:
Saul Centers manages neighborhood shopping centers in the Washington, D.C., area. They called half of their 6.875 percent 'C' issue (BFS.C) earlier this year but are unlikely to call the rest any time soon. This security went ex-dividend last week and trades at $25.05. It's very easy to own but hard to buy because it is lightly traded. Use a good-till-cancelled limit order.
I bought the Annaly Capital Management 6.95 percent Fixed/Float 'F' (NLY.F) when it was first issued. It remains a great value and yields just under 7 percent, can't be called until 2022, and in 2022 its yield will float at 4.993 percent plus three-month LIBOR. That's great if rates continue to rise. Good even if they don't. This issue is very liquid.
JPMorgan Chase just issued its first preferred stock since 2015. The JPMorgan Chase 5.75 percent Series DD (JPM.D) will have a BBB- rating from Standard & Poor's and is callable as of Dec. 1, 2023. It currently trades just above par, yields 5.7 percent, and, unlike the other securities in this article, it pays a qualified dividend that will be taxed at a favorable rate.
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Now to exchange-traded debt. Prospect Capital's 6.25 percent Notes (PBB) is an investment grade security that mature in 2024. If you hold this security to maturity then you eliminate the risk of rising interest rates. PBB trades just below its $25 par value.
Similar to Prospect Capital's security, the Medley LLC 7.25 percent Notes (MDLQ) matures in 2024 so once again interest rate risk is removed by holding it until then. Medley is a business development company so its fortunes are tied to the economy. These notes are not investment grade.
Most people don't own preferred stocks and exchange-traded debt because brokers don't recommend them and individuals don't understand them. Yet, in terms of risk they offer an outstanding reward. They play 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.