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This Safe-Haven Bond Pays 8%By
Monday, August 30, 2010
Investors are pouring so much money into bonds right now, many experts are calling it a bubble...
In Saturday's essay, I showed you a few examples of this stampede, including the tech-bubble-sized amount of money flowing into bond funds and the lowest-ever yield on a corporate bond, issued two weeks ago by Johnson & Johnson...
The thing is, while most areas of the bond market are ridiculously overvalued, one subsector of the bond market is still offering safe 6% to 10% yields.
I'm talking about preferred stocks.
Most investors have never heard of preferred stocks, and the few that have don't understand them. Because they won't buy them, yields haven't fallen in line with other bond investments. You'll still be able to collect "meaty" income from these safe investments.
Last week, I noticed all the preferred stocks in my 12% Letter portfolio had jumped in price. I'm worried investors have finally discovered this opportunity and it's about to disappear.
So today, I'm going to "pound the table" one more time... and give you the name of one of my favorite preferred stock investments to get you started. It's extremely safe and pays an 8% yield at current prices...
First, don't be confused by the name "preferred stocks." Preferred stocks are bonds. They pay a fixed interest rate, and the issuer must pay back your loan at the full face value of the preferred stock. While many bonds come with $1,000 face values and require $50,000 minimum investments, preferred stocks have face values of $25, and you can start your preferred stock portfolio with less than $500.
Maturity is another big difference between a preferred stock and a bond. Bonds always have a maturity date... the date when the issuer must return your money to you. Preferred stocks have no set maturity date. They are perpetual. This means the issuer can keep your money as long as it wants – and you can keep collecting income. When you want your money back, you simply sell your preferred stock to another investor at the current market price.
Regular bonds can be a nuisance to trade, even after you get over the minimum investment hurdle. The great thing about preferred stocks, on the other hand, is they trade on the stock exchange like regular stocks, using regular stock market symbols. You pay the same commissions and trading fees as you would for any other stock purchase. They trade online and you can hold them in your IRA.
As I've told you before, Quantum Online is absolutely the best place to research preferred stocks. It's a free website devoted to fixed-income investments that trade on the stock market, including preferred stocks. Quantum Online will give you all the information you need to research a preferred stock, as well as lists of all the preferred stocks available in the market.
But I thought I'd get you started with one of the preferred stocks I hold in my 12% Letter portfolio...
It's issued by Odyssey Re Holdings. Odyssey is a large insurance company with operations all over the world. It's also an extremely conservative organization that doesn't like to take risks. In 2008, for example, while the stock market was crashing and Wall Street was locked in a credit crunch, investors used Odyssey's stock as a safe haven, and its price rose 42%.
If its stock price rose in the credit crunch, you can imagine how safe its bonds must be.
Odyssey's Series A preferred stock trades under the symbol ORH-A (use ORH-PA to look it up in Yahoo Finance). This preferred stock pays a quarterly dividend of about $0.51. Right now, it trades slightly above face value, at $25.50, giving it a yield of 8%.
While most investors are happy getting 3% yields from a Treasury bond or a corporate bond, my readers are getting 8% from this very safe Odyssey preferred stock. (Plus, I recommended this bond when it traded for around $24, so we're showing a 6% capital gain on top of the 8% dividend we're receiving.)
There's a bubble forming in bond investments. Most bonds have such tiny yields, you probably won't even notice the income they're paying. Preferred stocks are the one exception. They're as safe as bonds. But because most investors don't understand them, they won't buy them and we can still get high income yields.
Right now, yields range from around 6% to 10% on the safe bonds I've been researching... If you're looking for safety and income, you should consider preferred stocks.
Good investing,
Tom
Further Reading:
The government's 0% interest-rate policy has set the bond market on fire, pushing yields down and prices up to dangerous levels for fixed-income investors. But as Steve has showed DailyWealth readers, that's not the only bubble "Helicopter Ben" Bernanke is inadvertently blowing right now...
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