Market Pulse: Reducing volatility while seeing solid returns
Would you like a 7-percent return without being subjected to the volatility of the stock market? How about 6-percent in a security that Standard & Poor’s rates BBB-, which is investment grade?
There are no guarantees, but that’s what investors can expect to receive if they hold two exchange-traded notes until they mature in 2024. Details are below.
As good as stocks have been, many investors still find market volatility unacceptable. One way to reduce volatility is to own dividend paying (and raising) stocks or own a dividend ETF like ProShares Dividend S&P 500 Aristocrats (NOBL).
To further reduce portfolio volatility while still receiving solid returns, one should hold exchange-traded debt and preferred stocks in a diversified portfolio.
The preferreds that I’ve most often written about remain attractive and I’m still a buyer. The RenaissanceRe Holdings 5.375% Preferred ‘E’ (RNR.E) yields 5.44 percent and pays qualified dividends. S&P rates it BBB.
I’ve also written many times about Saul Centers 6.875% Preferred ‘C.’ This unrated security trades below par at $24.73 and yields 6.95 percent. It doesn’t trade much so use a limit order. This preferred does not pay qualified dividends.
Now to the securities that I mentioned above. Medley LLC 7.25% Senior Note (MDLQ) trades at its $25 par value, yields 7.25 percent, and pays interest four times a year. The security is unrated and would be below investment grade if it were.
The parent company, Medley Management (MDLY), is a credit-focused asset management firm. The second security is Prospect Capital 6.25% Note (PBB). It currently yields 6.12 percent, is rated BBB-, and pays interest four times a year. Notes pay interest, so the income from these securities is not “qualified.”
What’s especially nice about MDLQ and PBB is that they can be bought and sold just like stocks. Their prices are stable, but will tick up or down inversely with of interest rates. Of course price movement doesn’t matter if you hold them to maturity in 2024.
The main risk is company specific — that they won’t be able to pay their interest and at maturity their principal. Most people find that risk acceptably low.
Bottom line: These aren’t the only attractive securities. There are still good choices for those who need investment income or want to lower portfolio volatility. They are not too good to be true.
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.