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Minis Are Better Than the Mattress

10/03/2011 11:30 am EST

Focus: ETFS

Neil George

Editor, Profitable Investing

In today’s market, you can’t just pull out, because dollars are worth less every day, says Neil George of The Pay Me Strategy, who points out 4 corporate mini bonds that are almost as safe and have higher yields.

Neil, investors are clamoring for stability. Is there any stability in this volatile environment?

Well, Karen, for many people the idea of stability at this point is the mattress. The idea of just stuffing it with more cash.

Or a coffee can.

Or the coffee can, exactly. But the problem there is with the dollar doing what it’s been doing against the rest of the world, and some inflationary pressures, that’s not really creating a stable environment other than effectively creating more stability as you effectively see your purchasing power erode and see that cash effectively burn on an ongoing basis.

So you can’t just go with the mattress. You have to be able to look at the market intelligently and seek out where there are opportunities.

It’s not the US Treasury market. It’s not necessary for the long term in things like gold bullion and so forth which obviously has been doing well. But there are other ways in which you can invest to get a very strong solid yield, while being able to avoid some of the daily, weekly, and monthly volatility that many of us have been experiencing.

Where do you see that?

Well, the key thing has been in an area of the market that I’ve been writing about in my publications and talking about on I term them as corporate mini bonds.

These are corporate bonds of major corporations from the US and around the world that effectively have been cut into smaller pieces that trade in typically $25 size.

They trade just like a stock, or more specifically they look and trade like a preferred stock on the New York Stock Exchange, so it’ll fit into anybody’s IRA account, anyone’s 401(k), anyone’s general brokerage account. And these basically pay their dividends effectively on a quarterly basis, and a vast number of these things are paying dividend yields at 7% to 9%. They come in various industries.

Now you might say, well if this is the case, why aren’t we seeing more activity? Well, they really were built and designed for an individual investor.

So the big institutions, the traders, the hedge funds, there’s not enough there to have fun with. So they’re not shorting them, they’re not buying and selling them. so it’s kind of left sort of in that dusty part of the New York Stock Exchange that I refer to as the annex or the garage of the New York Stock Exchange.

So by looking at where the big guys aren’t, that’s where you’re going to get that stability, because no one’s playing with them, no one’s shorting them, and no one’s manipulating them.

How about the liquidity if the big guys aren’t there?

The big guys aren’t there. The liquidity is going to be less on selling. In other words, if you were to compare many of these with let’s say what happens with Apple (AAPL) or IBM (IBM) or Exxon (XOM), there’s nowhere near the volume.

For the average new investor, you can play your orders, have these filled to any basis, and the idea is that you really want to buy and own these for longer periods of time. Once people have experienced and seen how these work, they’re going to wonder why they didn’t do this for so many years in the past.

The only reason that you probably want to sell is if you actually might need the cash for something else.

So can you give me some examples, Neil?

Well, Karen, yes. There are several out there in different industries. The first industry that I’d like to start with are some major banks.

The idea is that that many people are concerned about the banks right now. Bank of America (BAC) is having a great deal of upheaval because of their acquisition of Countrywide. You have the idea that some of the major French banks are having some concerns over how they’re actually dealing with some of their writedowns, and so forth.

The key thing is that the major banks have already gone through a massive capital transformation, and while the common stocks really are very volatile and many are being sold off like Bank of America, the idea is buying and investing in banks for growth just isn’t going to be there. These entities are really turning into heavily regulated utilities.

But at the same time that’s perfect for a bondholder, because you know that the Federal Reserve and the other regulators are watching these guys like a hawk, and have basically made them ramp up their capital. Therefore, they have more capability to pay their dividends now than they ever did before—no growth, but very stable.

So a couple of examples would be Regions Financial (RF). There’s one that trades as RF-PZ on the New York Stock Exchange. It pays about 10% right now. Again, the key thing is that while the common stock has been going all over the board, the preferred pretty much just kind of bobbles along.

Another is Goldman Sachs (GS). Goldman Sachs again, the common stock has been bashed around. Everyone seems to in the administration have sort of a maxi grind in trying to make Goldman Sachs look bad. Again, you look at JZS, JZS on the New York Stock Exchange is their mini bond, it pays about 7% to 8% and it just sort of bobbles along even during periods of time where their common stock is being bashed.

It’s not just banks, but we can also look at some other industries. News Corp (NWS), the idea that News Corp might be politically untenable, because of the concerns over…

Hacking, spying and all that.

Hacking and everything else, with literally which it represents a…tiny, tiny fraction of what the overall empire of News Corp is. They can close down massive numbers of newspapers and it would have a very marginal impact.

The key thing is that while the common stocks have been bashed around, their credit worthiness is huge; tons of cash on the balance sheet. We’re talking billions and billions of dollars on the balance sheet.

That’s why the mini bonds with a trading symbol GJV have, again, if you look at the chart you’ll see almost a flat line of stability. Again, paying a yield of roughly about 7.5% to 8% on a quarterly basis. You’ll see that’s another example, these things as a universe. Just as trade pretty much is very slow and steady.

Then I can mention like an insurer. Aon (AON), of course, is a major insurer. Again, very heavily capitalized. KTN is their mini bond, and again you’ll be getting about 8% from this very well capitalized, well regulated insurer, right on the New York Stock Exchange.

Stability and income, that’s my type of investment.

Exactly, and that’s what I live by.

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