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The Seven-Percent-A-Year CDBy
Friday, February 17, 2012
At the World MoneyShow last weekend, speaker David Gladstone mentioned an interesting idea...
It's something I immediately thought of as the Seven-Percent-A-Year CD.
In this idea, you get 7% a year in interest... And in less than five years, you get your original investment back. Sounds like a CD to me – but with a much higher interest rate.
And it's not the only one of its kind...
The Seven-Percent-A-Year CD is not issued (or guaranteed) by a bank. It's not backed by the FDIC.
It's actually a "term preferred stock" that trades on the New York Stock Exchange. It was issued by Gladstone Capital. So your main concern is the creditworthiness of the issuer – Gladstone Capital, which lends money to small and medium-sized businesses.
What's interesting here is, in plain English, if Gladstone goes bust, you'd get paid ALL of your principal AND interest back first, before shareholders – including David Gladstone himself – would get any money for their shares.
And that is the big difference between "preferred" stock and regular stock.
If a business goes bust, then when everything gets liquidated, lenders get paid first, preferred shareholders get paid second, and regular stockholders get paid last.
Preferred shares sit right between bondholders and stockholders. So they share some characteristics of both...
They pay a fixed interest rate, like a bond. The issuer has a legal obligation to pay the interest, and it must pay back your loan at the full face value of the preferred stock. So preferred stocks tend to be much less volatile than standard shares. But many of them trade on the stock market just like regular stocks do. You pay the same commissions and trading fees as you would for any other stock purchase.
With interest rates so low right now, the yield you can get on some preferred shares are attractive. But to get the high interest, you have to be careful about the price you pay.
The Gladstone preferred stock, for example, will yield 7%, as long as you don't pay more than $25 for it. If you pay more than $25, your net interest rate goes down dramatically:
As you can see, the more you pay, the more you start to shoot yourself in the foot.
If you're interested in these particular preferreds, do your homework on Gladstone. And USE A LIMIT order. There are very few shares outstanding. And buying interest from this DailyWealth letter could cause the price to spike.
If you'd like to see what else is out there, the "go to" place for information on unique securities like these is www.QuantumOnline.com. It's free, but you need to register before you can use it. Click on "Income lists" and then select "All preferred stocks."
In a world where it's hard to find decent interest on anything, preferred stocks may be a great place to look.
Good investing,
Steve
Further Reading:
DailyWealth classic: Most investors have never heard of preferred stocks, and the few that have don't understand them. But in a zero-percent world, preferred stocks can be a safe way to increase your income. Learn more about how they work here: This Safe-Haven Bond Pays 8%.
Market NotesA POSSIBLE 50% "BREAKOUT" IS COMING FOR STEELMAKERS The steel rally we've been expecting is starting to firm up... just look at the price action in "MT."
In late August, we noted how companies that produce steel to build skyscrapers, cars, bridges, and power lines are among the greatest "boom and bust" assets in the world. They soar and crash as the global economy fluctuates. These companies also have thin profit margins... which adds to their volatility.
It's easy to see this volatility through shares of the world's largest steel company, ArcelorMittal (MT). Like most assets, MT was hammered in late 2011. Shares fell from their summer level of $35 to $15 (a 57% haircut). But the broad market action has turned bullish, and beaten-up MT has bounced off its lows around $16... The stock is now poised to "break out" to new multi-month highs around $22.50.
We can't know how long the economy will stay "half full" and push up stock prices in general. But we can say that the trend is currently up. This could produce at least a 50% "bad to less bad" rally in MT and its fellow steelmakers.
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