Despite 20 years of investing experience, I still manage to miss some investment categories sometimes.Sure enough, a new category popped onto my radar by accident (more on that in a moment), and these are solid dividend investments paying 6% or more. Perhaps best of all, they appear to be as safe as preferred stocks.
The securities are called exchange-traded debt, or ETDs, so named because they are debt instruments that trade on the stock exchange. The trouble I’ve always had with bonds is that they can be difficult to trade. Many companies have attractive debt, but tracking down CUSIP numbers to trade them can be tricky. In addition, the liquidity of the trades is such that they are sometimes difficult to get executions on at the level you desire.
Exchange-traded debt very much resembles preferred stock in that they both have characteristics similar to bonds and equities. ETDs trade like stocks, yet their price range is narrow. They distribute income quarterly, but do so as interest and not dividends, so are taxed as ordinary income. They are subordinate to debt, but senior to equity and preferred stock. They have call dates, which run from 10 to 30 years. Most are issued at $25 per share and callable at that same price.
Given that long-term diversified portfolios often contain some form of low-to-no risk income security, investors may want to consider exchange-traded debt to replace things like Treasuries or even some high-yield muni bonds. Why? Well, the risk profile is close to Treasuries and maybe even better than distressed municipality debt.
The beauty of exchange-traded debt is that, like preferred stocks, any dividend cuts a company announces must first come from common stock. After that, preferreds get cut. It would take a near catastrophe for a company to have to cut debt service payments, including exchange-traded debt. So as long as you are holding ETDs of a relatively solid company, you should be in good shape.
I found this security because, while researching Goldman Sachs (GS), I accidentally typed an “F” after the company’s stock symbol. The result was that Goldman Sachs 6.125% Notes (GSF) came up. GSF stock interest is paid on the first of February, and every three months thereafter. While the maturity date is not until 2060, it is callable at $25 on or after Nov. 1, 2015. It is rare for an ETD to be called, however. Right now, GSF stock trades at $25.84, so the effective yield is 5.92%. S&P rates this debt at “A-.”
The other ETD I like is from another solid company. Prudential Financial 5.7% Junior Subordinated Notes (PRH) is trading at $24.40. PRH stock also has a maturity date well into the century, in the year 2053, with a call date in 2018. The annual PRH stock payments amount to $1.425, or 5.84%, with payments made on March 15 and every three months thereafter. S&P rates these notes as “BBB+.”
A little while ago, I suggested a stock that might be an undervalued play for under $15. It turns out that the stock has an ETD as well. Lloyd’s Banking 7.75% Public Income Notes (LYG.A) are rated “A-” by S&P, are callable afterJuly 15, 2015, and pay on January 15 and every quarter thereafter. The $1.938 annual interest payments on LYG stock amount to a 7.18% yield.
Sometimes, an errant keystroke can lead to great investment discoveries. In this case, an extra “F” at the end of Goldman Sachs’ ticker led us to find stable, high-yield investment vehicles. If you’re a dividend investor, you’ve got to love exchange-traded debt.
Lawrence Meyers does not own any security mentioned.