started investing when I was around 18.
The father of one of my good friends was a broker at Dean Witter Reynolds.
One day I went with my friend to visit
his dad at his office in downtown, Portland, Oregon. I was a little star struck as so much was going
on around me. People sat or stood around
watching the prices roll across the big electronic ticker tape screen on the wall
and making notes and talking to each other.
It was exciting, but the best part came once I talked do my friend’s
dad. He talked a bit about the market
and some of the companies he was excited about. He didn’t realize it, but his
enthusiasm convinced me to dip my toe in the water. I ended up buying GAF (General Aniline and
Film) before I left his office. Do you
remember the little View Master that displayed pictures of Disney and other characters
into view one after another? That little
gadget is long gone, but during this period, it was a big deal. I eventually doubled my small investment
after a relatively short period of time.
This was my initiation into the wonderful world of investing.
many new investors, I have made a lot of mistakes. After years of trying to hit home runs from
buying stocks at low prices and riding them to the mountaintop, I was lucky to
hit a single or double. I say I was
lucky because all too often, I struck out or hit foul balls. This became very expensive; not only because
I was rarely successful on a consistent basis, but the cost of every
transaction was high. Most trades came
about by phoning my broker. That took
time and cost a percentage of the total amount invested.
has never been quite as rewarding as that first investment, but through “trial
and error investing”, I have found a way to invest that I am comfortable with
and enjoy. Knock on wood, as it now
provides a nice income that is relatively safe, reliable and continues to
grow. I consider myself an “income investor”. I focus
99.9% of my efforts into investing in securities that provide a minimum of 6%
yield. This focus has come about from
realizing that I was not successful enough to make money consistently from
stocks that appreciate in value. I
slowly began to see the value in investing in companies that paid a
dividend. As this change took place, I
started to recognize the different ways to invest for income and in the many
classes of companies and securities that paid dividends or interest. I feel that there are 2 basic ways to invest
Higher Yielding Securities.
securities generally do not generate dividend growth, nor do they provide an
opportunity for long term appreciation.
benefit of investing in securities with higher yields is that you receive more
income – immediately. You don’t have to
wait for companies to increase their dividends over several years. The good news is that there are a lot of
options available. The bad news is that
the risk level is generally higher than lower yielding investments. There is additional good news as there are
many exceptions where investors can obtain higher yields with lower risk.
Lower Yielding Securities
securities generally have the ability and willingness to pay and increase
dividends. And because of this growth,
they also provide an opportunity for long term appreciation.
The benefit of investing in securities with lower yields that grow dividends is that over time, these companies will generate increasing income and increasing appreciation. The bad news is that it could take a long time before the results are high enough to meet your needs. More bad news is that not all low yield, dividend growth companies are successful.
Yield and Risk
general, as the yield increases, the risk also increases. The lowest yield class are those companies
that have a history of increasing their dividends for 25 and more years in a
row. That is quite a record. They deserve to be classified as low risk. At the other end of the table are the companies
that have the highest yield, the mortgage REIT companies. That top spot does not come easily. Investors have voted with their dollar. Investors have said that the only way they
will invest in them is if the yield is high enough to compensate for the risk.
Each of these classes provide benefits to investors; however, as an income investor that invests on higher yielding securities, I have built my investment portfolio on a foundation of securities that yield more than 6%. As an admitted “Yield Chaser”, I have learned the hard way that risk must be taken into account. Yield and Risk are the 2 sides of my investment scale.
Preferred Stocks & ETD Securities
I found that over the last 10 years, I gravitated to
companies with high yields that provided reasonable risks for safety and the ability
to pay their dividend or interest on a sustainable basis. The good news for me
is that there are a lot of choices especially when I focused my search on Preferred
Stocks and ETD securities. Yes, I do own
securities in all the classes with yields above those of preferred stocks &
ETD securities, but they are harder to find, and I tend to own them for a
shorter period of time. It is interesting that many of the stocks in
the higher yield classes have issued preferred stocks where risks are
lower. As an example, there are 8 cREITS,
14 mREITS and 29 BDC that have issued preferred stocks or ETD securities.
I have discovered that
there are over 600 preferred stocks & ETD securities with a par value of
$25 (I do not count convertibles). These
include 168 ETD securities, 278 traditional preferred stocks, 135 traditional
preferred non-cum stocks and 18 trust preferreds.
I now consider
preferred stocks & ETD securities as my investment foundation. The majority of my portfolio is built on this
foundation and from there I work my way higher with selective higher yielding securities. There are several reasons why I feel
comfortable owning preferred stocks & ETD securities. First, I consider myself to be a long-term
investor. I do not trade. I buy for the long haul. Preferred stocks are safer than the common
stock of their parent company and ETD securities are safer than the preferred
stocks. Next, preferred stocks cannot
stop paying the dividend unless they are in real trouble and not before they
stop paying the dividend on their common stock. That is very important as it provides a buffer
or hurdle that must be crossed before the parent company can stop paying the
dividend. Then, most preferred stocks have
the benefit of being “cumulative”.
This means that if they are forced to stop or delay paying the dividend,
they must accumulate those missed payments and pay them back to the investor
within a certain period of time.
That is not all the benefits, but it gives you an idea of some of the beneficial features of owning a traditional preferred stock. Yes, there are preferred non-cum stocks, but those are issued by companies that are generally considered stronger than the traditional preferreds. There are also ETD securities, which are even safer than preferreds as they are a debt and debts are higher on the list if it comes to the company being liquidated.
Interest Rates & Preferred & ETD
One of the issues
that many investors point to for not investing in preferred stocks & ETD
securities is that they are sensitive to interest rate fluctuations. If interest rates rise, then market prices
have a tendency to drop. I recognize
that this relationship is true, but many have missed out on this great class of
investments for many years only to find that most preferreds & ETDs are currently
at or above par. If you are a long-term
investor, the key is income, not the price.
Interest rates fluctuate just like the economy does. If interest rates increase today and into the
future, they will eventually change direction and fall once the economy
falters. Learn to take advantage of
Yes, interest rates
have increased, but many analysts feel that interest rates have peaked or
stabilized. We can see this trend in the
10-year treasury rate. During 2018, it
increased to over 3%, but has now dropped to around 2.65%. These
are sweet words for the preferred stock investor as stable rates means a stable
market for interest sensitive securities.
Here is one other
thing to consider. Have you ever thought
of buying an annuity? If you are 70 and purchase a Single Premium, Immediate
Annuity, you can probably receive about 6 to 6.5% yield for the rest of your
life. That doesn’t sound too bad until
you realize that when you are gone, the principal is also gone. However, if you were to invest the same
amount in a preferred stock or ETD security, you could probably earn a higher yield. The difference is that 100% of the principal would
be maintained and available to your heirs.
This article will be
continued with articles such as the financial metrics I use to determine safety,
reliability and dividend sustainability.
I will also present the various portfolios I maintain, such as the “Hot
& Spicy” portfolio, the “Meat & Potatoes” portfolio, the and the “Investment
Grade” portfolio. Each of these contain
specific securities that match the portfolio name.
https://ipreferincome.com/wp-content/uploads/2019/07/final-2.png00Richard Hillhttps://ipreferincome.com/wp-content/uploads/2019/07/final-2.pngRichard Hill2019-03-12 17:53:052019-03-12 17:53:05I Prefer Income Blog 3-12-19