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Asking Santa for More Yield

December 23, 2020

Editor’s Note: U.S. markets close early at 1 p.m. ET on Thursday, Dec. 24, and are closed all day on Friday, Dec. 25, for Christmas. Our Customer Service department is also closed on Thursday and Friday.

The elves are working around the clock this week getting all of the presents ready for Santa as he preps for his big ride on Christmas Eve.

But one of the big asks that Santa has been getting in his deluge of letters this season must be for more yield.

Yields in the markets are flat on the floor. Cash held at money market savings accounts such as at Synchrony Bank (SYF) yield a mere 0.60%. 90-day Treasury bills are at 0.08%. Even 10-year Treasurys are under 1%.

And the Federal Reserve is acting as its own version of financier Ebenezer Scrooge to keep rates as low as possible for a while for savers and investors.

US Treasury Yield Curve (Plotting Yields by Maturity)—Source: Bloomberg Finance, L.P.

Meanwhile, outside the US, yields are negative for trillions of dollars of government and other major debt.

Global Amount of Negative Yielding Debt in US Dollar Terms—Source: Bloomberg Finance, L.P.

All of this means that savers and investors in the US and beyond are getting squeezed with near zero or well less than zero yields. This of course makes for a bleak winter now and into 2021.

Santa’s Helper

I have always been a big fan of Santa. In fact, at my old publishing house, we would have an annual Christmas party for all of the families. And being twice the man (in girth) than I am today, I was fitted with the appropriate suit to stand in for the big guy.

So, for better yields, I’ve been doing my work for Santa. I do a lot of homework to find opportunities for more yield, really high yield, from securities that are not found in the mainstream financial news.

Santa’s Preferred Investment

Preferred stocks have their origin in the 1800s in the US. Railroad companies were already fully sold out of stocks. And banks were not remotely interested in making more loans or buying any more bonds.

But railroads needed cash to expand. This hybrid security that offered fixed income and equity participation if railroads did well, along with a call on credit and assets if they didn’t, fit the bill. The preferred stock was born.

Preferred stock is issued by corporations as equity to not broach credit covenants for bonds already issued. They generally come with fixed dividends that are just like bond coupon interest payments. And as fortunes of companies improve, so too will preferred stock prices.

Two preferred stocks are bargains right now. The first is the Atlas Corp. 7.875% Series H Preferred (ATCO.PH), yielding 7.7%.

Atlas is an investment holding company that owns APR Energy and Seaspan. APR provides turn-key power generation that’s mobile and can be set up to meet demands of governments and corporations as backup, in emergencies or for temporary needs.

Seaspan is a long-favored company that owns container ships that it leases out under longer-term contracts, like a landlord of the sea.

The preferred has a proven track record of payouts and has been gaining notice behind the scenes of the stock market. ATCO.PH is a great buy for more yield, ideally for a tax-free account.

Next is the Teekay LNG Partners 9.00% Series A Preferred (TGP.PA). Teekay is like Seaspan for LNG ships.

It owns a collection of in-demand vessels in a buoyant market. Like for Atlas, this preferred pays and keeps paying. And the market is quietly bidding for this yield opportunity. Buy TGP.PA for a yield of 8.5%, ideally for a tax-free account.

iShares Preferred Stock ETF (PFF) Total Return—Source: Bloomberg Finance, L.P.

For an indexed preferred buy, look at the iShares U.S. Preferred Stock ETF (PFF). It yields a bit less but keeps generating higher total return that for the trailing two years to date equals 25.7%. PFF is another high yield buy, ideally for a tax-free account.

Elfin-Sized Minibonds, Maximum Yields

Minibonds are issued by companies and look and trade like preferred stocks to the uninformed. But they’re really corporate bonds that were issued to sell to individual investors in sums around $25 or so rather than in traditional $1,000 sizes.

They don’t trade a lot, and they aren’t followed by many. So they gather dust, but they pay and pay well.

Two to buy are the JMP Group 7.25% Series D (JMPNL), which yields 7.3% and may be called soon for a quick additional gain, and the Cowen Inc. 7.75% Series L (COWNL), which yields 6.9%.

Both pay well and keep paying. JMPNL and COWNL are two more great buys for more yield, both for tax-free accounts.

North Pole Corporates & Munis at Discounts

Closed-end bond funds have always been favorites of mine. Buying bonds in a closed-end fund at discounts to net asset values (NAV) means buying at bargains that can’t be done in the regular bond market. US corporates continue to be the best performers in the bond markets.

The one to buy is the BlackRock Credit Allocation Income Trust (BTZ), which yields 6.8% and is trading at a discount of near 5%. Consider BTZ for discounted yield, ideally for a tax-free account.

Munis are also performing and should do even better into 2021, as tax revenues are much better around the US than the headlines would indicate. Nuveen has two closed-ends at discounts. The Nuveen Municipal Credit Income Fund (NZF) yields 7.7% on a taxable equivalent basis at a discount of near 6%.

For AMT-victims, it also has the Nuveen AMT-Free Municipal Credit Income Fund (NVG), yielding 7.6% on a taxable equivalent basis and at a discount of near 5%. NZF and NVG both work to deliver even more income, ideally for taxable accounts.

I hope that some of these undiscovered yield opportunities start to be met with more interest. And I wish you a very Merry Christmas!

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life