Market Pulse: Income vehicles on the buy list
September 22, 2017
We are in one of the most powerful and long-lasting bull markets. While I expect higher prices still, most believe that stocks will return about 7 percent annually for the next few years. If so, why not hold preferred stocks that will likely provide a similar return, but with less volatility and less risk?
In brief, a preferred is a "hybrid" security with characteristics of both common stocks and bonds. Most preferreds represent ownership in a company like common stock, and rank senior to the common when it comes to dividends and in liquidation. They are junior to bonds, but pay dividends (usually quarterly) like bonds pay interest (semi-annually).
Some preferreds pay qualified dividends, meaning that they are taxed at the lower 15 percent rate. Others (mostly REIT and trust preferreds) don't pay qualified dividends, so they generally yield more and are best for retirement accounts.
Here are three income vehicles on my buy list:
In this column I've written about preferreds from Saul Centers dating back to 2011. Saul Centers manages neighborhood shopping centers in the Washington, D.C., area. Their 6.875 percent 'C' issue (BFS.C) has traded around $25.50 for three years.
In early October, it will go ex-dividend and if past is prologue it will trade back to $25.50 before the dividend arrives! It's very easy to own but hard to buy. It's lightly traded. Use a good-till-canceled limit order to buy below $25.50 this month or below $25.30 in early October.
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The Medley LLC 7.25 percent Note (MDLQ) was issued early this year. Its high price has been $25.75, while the low price was $24.75. I'm comfortable with that. It currently trades at $25.35, and yields just over 7 percent. Medley is a business development company, so its fortunes are tied to the economy.
My favorite issue is the Annaly Capital Management 6.95 percent Fixed/Float 'F' (NLY.F) that was issued in August. I bought it in client accounts when it traded over-the-counter below par. Now, it's just above par and remains a great value. It 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 good if rates rise like many expect. This issue is very liquid.
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 2 percent! These preferreds are different. Rates would have to rise a lot before a 7 percent dividend wasn't attractive. Preferreds help diversify an equity portfolio, and they play a critical role in my client accounts.
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.