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These Bear Market Investments Pay 8% DividendsBy
Tuesday, July 6, 2010
Not all stocks pay dividends. Take Ford Motor, for example. It's one of the largest manufacturing concerns in the country. But its stock pays you no income.
Here's the thing: You can still get an 8% dividend from Ford. Just use ticker symbol F-S. (If you use Yahoo Finance, type in F-PS.)
Quite simply, some 200 businesses across the country, including Ford, have issued special securities to borrow money from the public. These securities trade on the stock market just like regular stocks, but they're really income securities. When you buy these securities, you're lending money to the issuing company. They have a legal obligation to pay you interest and dividends on your capital. When they've finished with your capital, they must pay you back your money in full.
The key is, the dividends on these securities are four to five times higher than the average dividend paid by common stock investments. And because they're debt securities, they don't fall when the stock market falls, so your money is safe in a bear market.
On Wall Street, these investments are known as "preferred shares" or "preferred stock."
Don't let the word "stock" confuse you. Preferred stocks are an unusual hybrid security similar to bonds... even though companies can record them as stock in their accounting statements.
There are thousands of preferred stock issues in America, and most of them are only traded in million-dollar blocks between institutions. Around 1,000 preferreds, issued by around 200 large companies, trade on the NYSE. They have symbols you can type straight into Yahoo Finance and any discount broker can buy them for you. You can get in and out of preferred stocks at any time. Commissions should be the same as on common stocks, and you can hold these in your IRA like stocks.
Take Ford's preferred stock as an example. It trades with a face value of $50 and pays a dividend of 6.35%. That's a yield of 8% at the current market price.
If preferred stock is a debt, what's the difference between it and a regular bond?
Maturity date is one difference. Preferred stock has no maturity. The company can redeem preferred stock any time after an initial lock-up period. Bonds mature on a set date.
There are other small differences. For instance, bondholders have a senior claim on assets in a bankruptcy over preferred holders. Bondholders pay income tax on their interest income, whereas the interest from preferred shares typically counts as dividend income, and the IRS taxes it at 15%.
Unfortunately, not many people know about preferred stocks. They trade in a tiny niche of the market. And stock exchanges consider them a burden to list and sell.
That's why Wall Street brokers almost never recommend them to their clients. And it's why 99% of Americans have never traded a preferred stock.
So how do you add these safe, high-income investments to your portfolio?
First, you need to research the list of available preferred stocks. The best website for preferred stocks and other stock market bonds is Quantum Online. It's truly an excellent resource. And it's free, but you need to register before you can use it. Click on "Income lists" and then select "All preferred stocks."
I tell my 12% Letter readers to stick with preferred stocks issued by the very strongest companies with large cash balances. This way, I know they'll get their money back no matter what happens in the economy or the stock market. We're able to earn 8% yields on average with this approach.
Once you've identified the preferred stocks you want to buy, trade them like you would any regular stock. Just be aware that preferred stock issues aren't as liquid as regular stocks. So make sure you use a limit order when you buy them.
By investing in preferred stocks, you can earn interest and dividend yields of 8%, 10%, and even 12% from companies that don't pay significant common stock dividends. Best of all, the issuing company has a legal obligation to pay you back your money in full, with interest, at the end of the loan. So these instruments will both pay and protect you in a bear market.
Good investing,
Tom
Further Reading:
If you don't mind doing a little extra work to earn big income – and get a potentially huge real estate kicker – you've got to check out tax lien certificates. Get the details here: An Oceanfront Florida Condo... for $4,600.
Market NotesTHE UPTREND IN THIS STOCK IS TOAST Over the past few weeks, we've profiled the end of several huge trends that have been in place since March 2009. Uptrends in Home Depot, Freeport-McMoRan, Chinese stocks, and Baidu have all been halted or smashed.
Today, we throw another big uptrend on the scrapheap: Cummins (CMI).
Cummins is the world's largest independent maker of high-horsepower diesel engines. It provides the motive power for many of the world's construction cranes, bulldozers, long-haul trucks, generators, and excavators. This makes CMI's profits and share price rise and fall with economic activity.
From March 2009 through April 2010, CMI enjoyed a huge 275% rally. Like shares of Freeport-McMoRan, folks piled into the stock in order to participate in the E-Z-Credit asset rally. But as today's chart shows, this rally has stalled. And a study of CMI's trading volume reveals the stock is suffering massive, high-volume selling from big money investors.
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