Are you frustrated by the lack of high yield stocks in all the safe, well-travelled corners of the world of bonds you’re used to visiting? Well, just like relatively undiscovered vacation bargains you hear about every once in a while, there are regions of the financial markets that offer deluxe yields with surprisingly low risk that remain known only to the cognoscenti. Here’s my guide to two of them.
The first such part of the financial world is my favorite — the great, sun-bathed shores of the fixed income market known as preferred stocks. These stock-bond hybrids combine the comfort of bond-like stable prices with the ready liquidity of stock trading. And, like their name implies, payment of their dividends takes priority over the issuer’s common stock. A preferred stock usually trades around its initial offering price, moving a few percentage points around it depending on the underlying health of the company that issued it.
Thanks to the Fed, interest rates are still near all-time lows and, despite the “tapering” of its bond-buying program, the central bank is still set on keeping interest rates near historic lows for the time being. As a result, Treasurys and high-quality corporate bonds just can’t compete with. My favorite in this space is Ashford Hospitality Trust Series E (AHT) — its symbol varies by broker – which pays an annualized dividend of $2.25 per share for a current yield of 8.49%. Ashford has maintained significant liquidity for many years, even through the financial crisis.
If you want diversification, go with the SPDR Wells Fargo Preferred Stock ETF (PSK). It offers a great yield of 7.44%. Financials comprise 81% of its portfolio, with top holdings including preferred stock issued by PNC Financial Services (PNC), MetLife (MET), JPMorgan Chase (JPM) and Wells Fargo (WFC). These are all companies that were relatively unscathed by the last financial crisis. The second biggest sector in PSK’s portfolio, representing 8.75% of the portfolio, is utilities, with names like Dominion Resources (DRU), Duke Energy (DUK) and Intergrys Energy (ICE). None of these is a high-flying growth company, but when it comes to preferreds growth is not the priority. What’s important is abundant cash flow and a solid balance sheet, and that’s what these holdings have in spades.
Another general destination for invigorating yields is the land of REITs. You can also thank the Fed for giving mortgage-based REITs longer-lasting appeal. These investments are particularly lucrative if the mortgages they invest in are 1) backed by the federal government (called “agency REITs”) and 2) interest rates stay low. They make their money off the arbitrage between the rates at which they can borrow money to purchase these investments, and the long-term rates of the mortgages they buy. My choice here is American Capital Agency (NASDAQ: AGNC) which currently yields 11.6% and as far as I can see, is safe for at least the next two years.
I like all of these opportunities because they are about as close as investors can get to the kind of deals one might find in the exclusive world of private equity – and that’s the kind of destination usually reserved for the high-net worth investor.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at firstname.lastname@example.org.
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