BG12062009
25 BUCK BUYS PAYING YOU AS MUCH AS 14 PERCENT
You and your portfolio don’t need drama right now – you need sold and simple stocks that pay you.
By Neil George
Everybody is getting all ecstatic over the pitch that the economy is fixed and on the rebound and that the stock market is back running with the bulls.
Now, it might well be true – and nothing would please me more than for all of us to be headed on to better times and market booms. But I’m not remotely ready to bet the farm on it – and nor should you.
My way of investing doesn’t need bulls or bears to work. I don’t have to worry about whether the Dow or S&P 500 is up, down or sideways today, tomorrow or next week.
Instead, by buying stocks that pay me to own them – all I have to make sure of is that I stress test them enough so that I can sleep knowing that the companies behind them will stay in business and that their checks will keep coming my way.
Even better, if I can own stocks that don’t just pay a good dividend – but have to pay a good dividend it ups the certainty factor for my portfolio.
What kind of stock not only pays a good dividend – but is actually contractually and legally obligated to pay a good dividend?
Stocks that no one on television or in the financial papers has ever mentioned. And for me – if it stays that way – you and I will be all the better for it.
Anonymous to me is the new synonym for profitable.
For if I can buy stocks that no one touts and that have to pay me every quarter or ever month a fat dividend – I can just keep humming along knowing that my portfolio is paying my bills and quietly growing its balance.
So, by now you should want to know what are some of my stocks that have to pay you and are nice and steady.
Ok. First, they look like stocks, trade like stocks – mostly on the New York Stock Exchange (NYSE). But second, they really are bonds – even if few really ever notice – including your broker.
Bonds are supposed to be for the big guys. You know – the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that actually continues to bring bonds back to the reach of the individual investors.
But there are bonds that look and trade just like regular stocks. And rather than being like traditional bonds with typical 1,000 dollar pieces in lots usually traded in the tens of thousands or millions – these trade in more palatable sums with face values of 25 bucks or less.
Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have various acronyms by the banks that put them together and brought them to the market.
I’ll start with one of them called Trust preferred securities (TRUPs). These are stocks that have been quietly trading for quite a while, yet haven’t been on most investor's – let alone brokers’ radar because they're just not widely touted by anyone.
Behaving much more like preferred stocks, regular everyday companies including big utilities and many other industries essentially issue them to bank holding companies which then package them up as a trust and then issue them to investors in the markets just like a stock.
The bank holding company then uses the funds to invest in bonds from the issuing company. Those bonds typically have intermediate to longer maturitiess and the cash flow from the bonds is what pays dividends on a TRUP.
That creates the advantage for the issuing company of being able to treat the TRUP stock as equity for its balance sheet without having to register the issue with the SEC, but the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds.
So the investor benefits from the steady dividends and the advantages and security of owning a bond and the company gets access to cheaper after tax capital.
There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINES (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.
But what makes them all similar is that they’re issued in sums typically amounting to 25 dollars with calls by the issuing company at their issuance price – again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TRUPs and then know the yield to the call price as well as the call dates.
The result is that you and I can put together a collection of these bonds from a variety of industries that pay us quite well – with yields running for most at between 7 to over 14 percent.
And even better, even though these trade like stocks on the NYSE – they tend to be very steady in price – even when the stock market is in a tizzy of trouble mostly because nobody in trading rooms or hedge funds knows about these – and that’s again perfect for us.
One more thing to note – because these are brought to the stock market by banks – some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don’t get spooked – just look behind some of the names on the stock tables to find the real issuer.
How about some examples of these bonds that trade like stocks?
I’ll start with an easy one from the giant US telecom company – Verizon (NYSE: VZ). The A-rated issuer has a TRUP trading under the symbol of PJL on the NYSE with a dividend of 7.625 percent due in 12/01/30.
Trading pretty consistently in the just shy of the 25 buck range – the yield is running currently at around 7.8 percent. I see this paying you a steady and solid dividend rate that trumps the dividend from the common stock and the regular bonds by a whopping margin.
Next is an issue with a bit more in yield from another telephone operator with regulated phone lines based in the Kansas side of Kansas City in Overland Park. Embarq has it’s 7.1 percent due 06/01/36 TRUP which trades on the NYSE under the symbol of FJA. The bond continues to trade a bit more up and down that the Verizon issue in mid to upper teens – giving us a yield bargain.
The result is a current yield nearing 10 percent payable every June and December. A newer issue – it’s not callable until June of 2012 which would be a huge gain for you at the current price in the market.
Verizon isn’t the only Baby-Bell to go to the NYSE for some of its bond issuance. Qwest (NYSE: Q) has had a pile of issues – but still maintains an impressive chunk of telecom assets in a crucial section of the US market.
I see the credit prospects of this utility being good enough to sustain the cash coming from the company’s TRUP trading under the symbol PKH. The bonds are the 7.75 percent due 02/15/31. They continue to trade positively – in the mid-teens dollar range. Callable like the others at 25 – so we have only upside if that were to occur. The yield therefore is a big one – currently over 12 percent.
Last up in my examples of these stocks that pay you comes from my favorite airline holding company – AMR (NYSE: AMR).
The holding company for American Airlines has a PINE trading under the symbol AAR paying 7.875 percent. Trading around 13-14 dollars apiece they’re generating a another huge yield of over 14 percent.
And while many might question the stability of owning a bond from an airline – note that the company continues to pay its bills, and has continued to prove that it can rollover credit lines and bonds and has continued to have ample access to new leases and other new lines of credit.
Finally, a man that liked to provide quality at a bargain price died at 78 years. Norm Brinker liked to sit down and enjoy a good meal. But at the same time, he didn’t like much of the fuss of formal restaurants – including the prices. So, he came up with an alternative and founded not just a collection of companies – but an industry now known as casual dining.
His legacy can be found in cities around the US and well beyond with names including Steak & Ale, Bennigans, Chiles – all park of Brinkers International (NYSE: EAT).
Neil George is editor By George and Stocks That Pay You.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
