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Investors
looking for solid gains have been wringing their hands since
the subprime crisis hit last summer and dragged us
into what some are calling the worst
downturn since the Great Depression. We haven't seen this much
volatility in the equity markets for almost 75 years. In
October, the total day-to-day point movement on the Dow was 7,818, more
than four times more than what was seen in 2007 and more than 10 times 2006. The S&P
500 is down roughly -42% for the year. The prospects for a
speedy economic recovery are nonexistent.
Paradoxically, income investors do
have something to celebrate lately. The virtual
meltdown in the credit markets has resulted in a surprising
silver lining; yields on safe, investment-grade preferred
stocks have been on the rise. Preferred stocks have
always offered better yield opportunities than other asset
classes -- but the gap has become even wider, thanks to the credit crunch.
The average yield for stocks in the S&P 500 is 3.5%, a rate
of return that is purely a function of unfavorable
mathematics after the U.S. benchmark has plummeted more than
-40%.
A six-month CD is only going to net you 2.9%. The
average bond yield, as measured by the Lehman Aggregate Bond
Index, is still only 5.2%.
But the 12-month yield on preferreds, as measured by the payout on the
PreferredsOnline Index, is 10.0%.
And dozens of high-quality preferred stocks are
paying higher-than-average yields right now. |
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Too Much of a Good Thing
Hurt by the credit mess, cash-strapped banks
are shoring up their balance sheets by issuing billions of
dollars in new preferreds. One of the biggest buyers of
these ultra-safe securities has been none other than Warren
Buffett, who bought $5 billion worth of preferred stock
carrying a 10% yield from both Goldman Sachs (NYSE: GS) and General
Electric (NYSE: GE). Many other companies are offering similar issues.
The increased supply of new preferred stock
flooding the market is sending share prices lower. And
since share prices and yields move in opposite directions,
the supply surge is also lifting yields to historically high
levels. That's great news for income investors at a time
when great financial news is at low tide, especially as the
Fed keeps pushing yields down on everything from Treasuries
to money-market accounts.
Preferred Income is Safer
Not only do preferreds
pay higher yields than stocks, but their payouts are more
secure than common dividends. Preferred shareholders have a
claim to a company's assets ahead of common shareholders --
that's why they're called "preferred." In other words, if a
company runs into trouble, it must pay preferred dividends
before common-stock dividends.
While a preferred stock can still default on its
payments, ratings company Standard and Poor's classifies
this as an "extremely rare" occurrence. Principal Global
Investors estimated the historical default rate for
investment-grade preferred stocks was less than 0.2%.
Unlike common dividends, preferred payouts are
predictable -- they don't go up and down with a company's
earnings. The most recent data from Standard & Poor's, in
fact, shows that November was the worst month since May 1958
for dividend cuts. (See "Income Notes" at the top right of
this page.)
And after the last few months of
whiplash-producing market swings, investors will enjoy the
low volatility of these holdings. Preferred stocks are also
a great way to diversify your portfolio to ensure regular,
timely dividend payments. This is particularly important for
retired investors, many of whom depend on their portfolios
to pay their monthly bills.
This Opportunity Will Not Last
Today's unprecedented gap between preferred
yields and the yields offered by other investment-grade
securities is currently being driven by a temporary supply
increase. As more and more investors gobble up the latest
preferred offerings, this gap will start to narrow. It's
time to lock in these outsized yields.
In the current issue of
High-Yield
Investing, my colleague Carla Pasternak updated her
subscribers on a preferred issue she has held in her
"10%-Plus" Portfolio since late 2005. This company's
business model is sheer genius: It uses ultra low-cost,
short-term loans to buy government-secured mortgage-backed
securities. In other words, it borrows at a very low rate,
collects a relatively high rate and pockets the spread.
Simple, but elegant -- and the preferred shares pay a rich
10.3% yield.
This preferred stock has made reliable distributions since
its IPO in December 1992. In total, investors who
bought when the preferred issue went public have enjoyed
over 180 consecutive payments -- come rain or shine.
And considering the challenges of the past year, this preferred
stock has held up very
well. During that time, it has registered a total return of +6.5%
-- outperforming the
broader index by 44.2 percentage points!
But that's nothing new, as this preferred stock has
outperformed the S&P by nearly 50 percentage points over the
last five years.
Carla has put together a comprehensive analysis of this
exceptional preferred stock opportunity. In her
profile, she spells out in detail how the safety of its
government-backed holdings and legally obligated monthly
dividend payments are especially attractive given the
current conditions in the markets. To read
Carla's report,
please visit this link.
Thanks for joining me on my search for today's
highest-yielding securities!
--
Nick Lanyi
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address,
Research@GlobalDividend.com,
to your Address Book or Safe List. For instructions,
go
here.
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