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Saturday, August 21, 2010

Searching For Mr. Yield

Are you a do-it-yourself investor searching for yield? Jump in the boat with everybody else. Let's take a look at trust preferreds. Trust preferred yields today exceed 6.5%.

Trust preferreds are equities with fixed income characteristics. They pay dividends quarterly, have a par value, typically are callable, and are rated by the major rating agencies. Their dividends can be cumulative or non-cumulative. The best resource for getting information on trust preferreds is at Quantum Online. CLICK TO ENLARGE THE GRAPHIC and you'll see information on a trust preferred issue for Ford. This page was brought up by typing F-S (a small irritant is that different financial sites have different ticker symbols for trust preferred issues) into the ticker symbol box. If you scroll down the page at the site, you'll see the ratings and other information. As you can see, there is a lot of information. You'll want to note when the issue is callable and at what price. Whether or not the dividend is qualified may be important to you. Do your homework!

If you scroll down, you'll see a link that will take you to a price graph where you can view the 12-month price chart. Today the shares are trading around $47/share, and last year this time they were bouncing along around $30/share - there is some volatility.

Worth Considering
You may be asking yourself whether it is worthwhile taking on such a risky position for more yield. First off, we know the continuing back story on Ford and GM. If you believe a double dip is imminent, you may want to hold off a bit until the haze clears. If you subscribe to the slow recovery view, some exposure may be worthwhile. No matter what- putting more than 5% in an issue like this is asking for trouble. Furthermore, for Ford and other widely held issues, you would want to make sure it is not held in other places in your portfolio. Always keep diversification in mind.

A way to get around the individual issue constraint is to buy an exchange traded fund that is indexed to this market. A candidate is PFF. If you go to Yahoo Finance, put in its ticker symbol and click "holdings" on the left. You'll see:

Note that Ford is the second largest holding. Again, do some research. Check out the price action. This ETF has been highly volatile. On 3/9/09 it traded at $15/share. Today it is around $40. You'll recall that 3/9/09 was the time of maximum pessimism in the market. Fears of dividend cuts and suspensions were widespread. It is not surprising that trust preferreds were hit especially hard.

I believe that those who have a decent risk tolerance might consider up to 5% of total assets in a fund of this type. Combined with a short-term corporate fund (example: CSJ), it can contribute meaningfully to overall portfolio yield. Understand that risk with any type of higher yielding issues needs to be carefully managed.

As always, investors should do their own homework or consult a professional to ascertain the appropriateness of investments for their specific situation.


  1. Preferreds have always been a good place to go for those in search of yield. I'm in PFF, but it is very heavy in financials and will get creamed if people lose faith in banks again.

  2. Grouch: You are exactly right on the banks, These are like high yield issues in my view. They outperform over 90% of the time but get creamed when a"black swan" type of event comes along. One of the big things in their favor is that trust preferreds are a low cost source of the type of capital banks need. As a result the regulators want to keep them going. If investors worried about their dividends it would hurt the market.
    Check out the quantum online link...I think you'll like it.

  3. I found the quantum link of couple of years ago, and you're right it is a great resource for yield investors.

    Anyone with a strong enough stomach to have invested in financial or REIT preferreds during the last financial crisis made a killing.... a 200-300% capital gain along with locking in a 12-15% or higher yield. Pretty darn sweet. I bought a couple, but wish I'd been a lot more courageous.