|
I have a special treat for you this week.
If you've read this newsletter for any length of time,
you're sure to know it's not the only advisory I write. In
addition to writing Dividend Opportunities, I also
research and write the premium High-Yield Investing
and High-Yield International newsletters each month.
Currently, more than 200,000 readers receive my free
Dividend Opportunities letter each week. I'm proud to
say that makes it one of the most popular sources of
income investing advice anywhere.
But there's something missing...
You see, if Dividend Opportunities is a Mercedes,
then High-Yield Investing and High-Yield
International are Rolls-Royces. These premium letters
are a step above and beyond.
With a month to research ideas and enough room for several
different features, my premium letters offer much more and
deeper analysis to subscribers.
So as a bonus for being a loyal Dividend Opportunities
reader, I've included a sneak-peek at an income idea from my
just-published June issue of
High-Yield Investing. I
hope it shows you just why this newsletter has become one of
the most popular premium income advisories in the world
(with 25,000 subscribers and counting!).
Enjoy!
Citigroup Funding ELKS 10% Bank of America
due 12/22/2010 (NYSE: EJW, $10.70)
-- This little-known security has a funny name... but
serious income potential. It's an
equity-linked security (ELKS), which tracks the price
performance of Bank of America's (NYSE: BAC) common stock.
Issued in November 2009 at $10 each, these ELKS mature on
December 22, 2010. Each note will pay a total of $1.075 in
two payments of $0.5750 per note on June 22nd and $0.50 per
note on December 22nd. Payments consist of interest (10%)
and option premium income (90%), both taxed at your marginal
tax rate. As such, EJW is best held in a tax-deferred
account.
With ELKS, at maturity you either receive $10 per note in
cash, or 0.62150 shares of BAC if Bank of America's common
stock trades at $10.46 or lower (currently they are
$15.44) any
time during the term of the ELKS. The holder also can opt to
receive the cash value of the shares due at maturity.
At $10.70,
EJW is currently trading at a premium to the par value. At
this price, interest payments of $1.075, plus assuming you
receive $10 per note cash at maturity, would mean total
returns of just +3.5%
(($10+$1.075 - $10.70)/$10.70)
in seven months.
But here's the kicker -- these notes are thinly traded, so
there are large price swings. On Tuesday, the shares traded
between $10.30 and $10.73 on just 12,000 shares. Just a few days ago, the notes traded
below $10 -- meaning a double-digit return. If you wait a
few more days, I think we could see that value again.
Although the ELKS are tied to the price of Bank of America
common stock, Bank of America doesn't actually have anything
to do with the notes. They are issued, and interest and
principal payments are backed, by Citigroup (NYSE: C).
Technically, these ELKS are unsecured senior debt of
Citigroup.
Things have dramatically improved at Citigroup since the
darkest days of the financial crisis. Credit-rating agencies
now assign Citigroup senior unsecured debt issues, like EJW,
high-quality investment grade ratings of "A3" (Moody's) and
"A" (Standard & Poor's). Citigroup posted its best quarter
in nearly three years in the first quarter and earnings
before interest and taxes (EBIT) of $11.6 billion easily
covered interest expenses of $6.3 billion.
But while Citigroup backs these notes, it depends on Bank of
America's share price as to whether you receive your $10
back at maturity or if you receive shares of Bank of America
from Citigroup. So what are the chances of BAC shares
falling from the current
$15.44 to the
$10.46 trigger price before maturity on December 22nd?
BAC had endured the financial crisis in strong shape
relative to other large banks. However, the bank used its
relative strength to buy beleaguered mortgage company
Countrywide and investment bank Merrill Lynch. While these
two purchases may prove wise in the long run, they had
seriously diminished the strength of the balance sheet.
However, the bank has come back strongly in the recovery.
After posting a $2.2 billion net loss for 2009, net income
recovered to $2.8 billion in the first quarter of 2010 on
the strength of reduced credit loss provisions and strong
trading performance in the capital markets.
Analysts expect the bank to earn $1.03 per share in 2010, a
huge improvement from the -$0.29 per share loss in 2009.
Also consider that BAC is currently trading
nearly +50% above the $10.46 trigger price, which it has not hit
in over a year.
Action to Take --> As
with most of these special securities, the notes are
relatively illiquid and any trading can sharply move the
price, so take small positions of, say, 50 to 100 notes at a
time. Interested investors may also wish to consider placing
a limit order of around $10.25 on these notes to ensure they
get a decent buy price. Finally, if the price moves close to
$11.075 any time before maturity, don't hesitate to take
your profits early.
Risk Meter: Moderate;
Ex-Dividend: June 15th (est.)
You know how valuable Dividend Opportunities is
each week... but I think you can see above why
nearly 30,000 serious income investors rely on
High-Yield Investing each month for
ideas. In fact, this is just one of eight
securities I profiled in June's issue... some
yielding as high as 10.9%.
And as a special offer, I've arranged to
have you join High-Yield Investing for
just $1. That's right, just $1 will give you
access to my premium High-Yield Investing
newsletter for 30 days -- plenty of time to see
if the research, picks, and high yields are
right for you. Simply
follow this link to take
advantage. |
Good Investing!
Carla Pasternak's Dividend Opportunities
P.S.
-- Don't miss a single issue! Add our address,
Research@DividendOpportunities.com,
to your Address Book or Safe List. For instructions,
go
here.
|
Printer-Friendly
