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High Yield for Uncertain Times
06/30/2006 12:00 am EST
"It only takes one hurricane to bruise you financially, and the same can be said of the market's recent turbulence," says Carla Pasternak. "Will things return to normal? Over the long run, the answer is probably yes, but it sure doesn't hurt to batten down the hatches while you ride out the market's volatility."
"In today's uncertain market environment, securities that preserve your capital and also provide growth potential look especially attractive. I’ve found two convertible preferred shares with double-digit yields. These preferreds allow you to convert your shares into common stock at any time.
"This feature is especially attractive when the security's underlying common stock is in an uptrend. You can also choose to retain the preferred shares and keep receiving interest payments until maturity, at which time you will be repaid your principal.
"SuperTel Hospitality 8% Series A (
"SuperTel's common stock yields about 6.6% and provides capital gains
potential, but the preferred shares are especially attractive to conservative
investors looking for guaranteed principal. The preferred shares now yield 7.6%
based on an 80-cent annual distribution, paid monthly. Moreover, the shares are
convertible at any time into 1.77 common shares of SPPR. At a recent price of
$10.52, investors in this firm's preferred shares are paying just $5.94 for
common shares that are selling for $6.02 on the open market.
"Although the preferred shares are convertible at the holder's option, a provision allows the company to force the conversion if the common stock sells for $7.36 or higher over 20 consecutive days starting in 2009. The shares aren't redeemable for three years. The preferred share dividend doesn't qualify for the reduced 15% tax rate. As such, the shares are best held in a tax-deferred account. I like SuperTel's preferred shares for conservative investors who want to guarantee their principal.
"I also recommend Ford Motor Capital Trust II convertible 6.5% (
"Based on the current price of
the preferred shares, investors would have an incentive to convert into common
stock if Ford's common shares rose to around $10 per common share. Given that
Ford's common stock has traded above $10 as recently as last year, the shares
could certainly return to those levels. The preferred shares can't be called
until January 15, 2007, and (barring bankruptcy or liquidation) will be redeemed
for $50 per share—
well below what you can
buy them for today.
"As you might expect, Ford's preferred shares are rated below investment grade. That said, the company has paid its 81-cent quarterly payments like clockwork since December 2003. Meanwhile, Ford is in turnaround mode and company earnings are expected to improve +35% next year. Looking beyond that, analysts are calling for Ford to deliver long-term earnings growth of about +5% over the next five years.
"This beaten down blue chip is in the early stages of a turnaround. By investing in the firm's preferred shares now, investors will be able to reap the rewards if Ford's restructuring efforts start to pay off over the next couple of years. As such, the shares are suitable for aggressive investors who can tolerate the risk that comes with this potentially high-reward turnaround play."
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