Market Pulse: Too good to be true?
May 15, 2017
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. A great way to reduce portfolio volatility, while still receiving solid returns is to hold exchange-traded debt and preferred stocks in a diversified portfolio.
Fixed-income securities are having an exceptional year as investors chase yield in what remains a low-rate environment. The iShares Preferred Stock ETF (PFF) is up 4.5 percent before dividends. Readers of this column know that I prefer holding individual issues directly.
The preferred that I've most often written about is RenaissanceRe Holdings 6.08 percent Preferred 'C' (RNR.C). Previously, the issue was near or just below its $25 par.
Now it's an unacceptably high $25.60. Good for shareholders, bad for those looking for a good entry. I've also written many times about Saul Centers 6.875 percent Preferred 'C.' It trades at $25.45, but is hard to buy because it doesn't trade much. Trading picks up at the start of every quarter when it goes ex-dividend, so July should represent a good entry point.
Now to the securities that I mentioned above: Medley LLC 7.25 percent Senior Note (MDLQ) trades just above its $25 par value, currently yields 7.2 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 percent Note (PBB). It currently yields 6.08 percent and pays interest four times a year. Notes pay interest, so the income 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 the direction 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.