Extended markets ran into resistance where expected this week, within the Sept. S&P 2810-2820 (S...
5 Smart Income Picks to Start the Year
01/27/2012 9:15 am EST
There are some great picks, especially preferreds, that investors can still take advantage of and grab some big income streams, writes Richard Lehmann of Forbes/Lehmann Income Securities Investor.
Note the ticker symbol has not changed, but the cusip has changed from 36244N109 to a new cusip, 36465A109. The Fund’s primary investment objective, risk profile, and management team will not change, nor will the number of shares.
The fund’s objective is a high level of current income by investing in stocks of gold and natural resource companies. The fund generates income by using a covered-call writing strategy.
It currently yields north of 11%, and trades at a discount. It is a buy at these levels.
Goldman Sachs (GS)
The sixth-largest US bank by assets, Goldman provides a wide range of financial services. The company’s 6.25% preferreds (PYK) were recommended in May 2009 at a price of $17.76, for a then-current yield of 9.21%.
Goldman has been caught up in the financial turmoil affecting most of the world’s large banks. This preferred was issued by Merrill Lynch based on a capital security of Goldman Sachs. Depending on the quote service, the name of this security could be Merrill Lynch Depositor Inc or some gobbledygook like PPlus Trust Ser GSC-1 Tr Ctf Cl.
This type of security, issued by Merrill, is known as a PreferredPlus, and is similar to other third-party trusts in its structure. The important entity with this security is not Merrill Lynch but the underlying security, issued by Goldman Sachs.
Standard & Poor’s downgraded the credit rating for Goldman on November 29 to BB+. Fitch followed on December 15, when it downgraded many large banks including Goldman.
Fitch cited “market challenges the banks face from both economic developments as well as a myriad of regulatory changes.” Despite the downgrade, we still think the preferred is worth holding, and would buy on any significant dips below $22. [The preferreds were trading close to $25 on Thursday afternoon—Editor.]
Cutwater Select Income Fund (CSI).
In an investor alert posted on December 9, we alerted investors to another unexpected name change. The Rivus Bond Fund (BDF) was recommended in November 2011at a price of $18.21. On December 19, the fund changed its name and symbol to Cutwater Select Income Fund (CSI).
Its investment strategy has not changed, and it continues to seek a high rate of return from interest income and trading activity. It seeks capital appreciation by buying debt securities at prices below their intrinsic value, and it buys mostly investment-grade debt.
The fund now trades around $19. Since our recommendation, the fund paid a dividend of 28.75 cents. It is still a buy at current price levels.
Sears Holdings (SHLD)
This iconic retailer operates in the US and Canada. Sears merged with Kmart in August 2005, and the combined company is known as Sears Holdings Corp.
The company’s 7.25% third-party trust preferreds (SSRAP) are based on the 7% Debentures due 2032 issued by Sears Roebuck Acceptance Corp. The preferreds were delisted when Sears and Kmart merged, but continued trading on the pink sheets.
Recently, Sears reported poor December sales and announced it would close nearly 200 stores. The news sent the common stock and the preferreds down sharply. The preferreds dropped to $10 per share; they now yield 18.12%. We last mentioned the preferred back in 2008 when it was trading at $14.
This third-party trust preferred has a 7.25% coupon, although the bonds coupon is only 7%. This means that the party bought the bonds at less than par value. Sears Holdings’ debt is likely to be downgraded in the coming months, but we still consider this a hold.
Sprint Nextel Corporation (S)
Sprint offers wireless and wireline communications products and services. Two of Sprint’s third-party trust preferreds have been recommended in the past: The 7% CBTCS (Corporate Backed Trust Securities) preferreds (JZK) and the 6.5% STRATS (Structured Repackaged Asset-Backed Trust Securities) preferreds (GJD).
Both trusts issuing the preferreds hold the same bond, the 6.875% bonds of 2028. The difference is that each trust bought their bonds at different prices, accounting for the different coupons.
The price of each preferred varies constantly through the day, but their comparative worth is hard to gauge because they have different coupons. The JZK preferred pays out $1.75 per year and the GJD preferred pays out $1.63. Subscribers can calculate the relative yields based on the above just before a purchase.
Sprint is taking a financial gamble by starting to carry Apple the iPhone itself for the first time. The move has some risks, but also allows them to compete with AT&T and Verizon.
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