Income investors need not settle for the piddling yields many blue-chip stocks offer today. With the right security, they can capture far greater yield. Better yet, they can capture this yield while reducing their risk.
That’s right. Higher yield and lower risk.
The right security is an exchange-traded note (ETD), which I discussed in detail last week. ETDs are affordable debt instruments that are as easy to buy and sell as any share of common stock. And because an ETD is debt it’s a contractual obligation to the issuing company. It has a higher claim to a company’s earnings and assets compared to common stock.
Three ETDs are particularly attractive. All are high yield and rated “investment grade,” which is no surprise. Most everyone is familiar with the strong brands and long operating histories of these blue-chip companies.
3 ETDs from Blue-Chip Companies
Prudential Financial (NYSE: PRU) has been around seemingly forever. Over its 137 years in business, it has grown to become one of the world’s largest life insurers, with a market cap of $39.5 billion and over $1.1 trillion in assets under management.
In other words, Prudential is a big, safe blue-chip stock. Unfortunately, its dividend yield – at 2.5% – is middle-of-the-pack. Income investors can do better with Prudential’s (2053 maturity) ETD (NYSE: PRH), which pays $1.425 in annual interest. At the current market price, around $22.90 a share, Prudential’s ETD generates a 6.2% yield, nearly two-and-a-half-times the yield of Prudential’s common stock.
Prudential’s ETD is first callable in March 2018. Should it be called, Prudential ETD investors are ensured a capital gain because of the $25-per-share redemption value.
Anyone who has seen a power tool is likely familiar with the Stanley Black & Decker (NYSE: SWK) brand. This blue-chip company has been around since 1843, Black & Decker since 1910. Both brands are venerated among professionals and amateurs alike.
That said, Stanley Black & Decker’s dividend yield isn’t quite as venerated with income investors. At 2.4%, the yield is only also-ran.
You can do better with Stanley Black & Decker’s (2052 maturity) ETD (NYSE: SWJ). This ETD yields 6.1% based on the prevailing market price and the $1.438 annual payout. Stanley B&D’s ETD is first callable in July 2017. Like Prudential’s ETD, Stanley B&D’s ETD yields nearly two-and-a-half times the common stock.
And like Prudential’s ETD, Stanley B&D’s ETD ensures a capital gain should it be called at the $25 redemption value.
When Warren Buffett invested in Goldman Sachs (NYSE: GS) a few years ago, he bypassed the common stock. He negotiated for a high-yield income investment instead. Given Goldman’s measly 1.3% dividend yield, income investors might want to mimic Buffett’s income-centric strategy.
They can do so by investing in Goldman Sachs’ (2060 maturity) ETD (NYSE: GSF), which pays $1.531 annually to yield 6%. This is 4.6 times the yield the common shareholders receive.
The GSF is first callable in November 2016, which is still a year-and-a-half out. The Goldman ETD trades at a slight premium to the $25 redemption value. So, should the GSF be called (and because it can be called doesn’t mean it will), investors could suffer a slight capital loss. Still, they’d be well-compensated by the additional income they would receive over their holding period.
I have to mention one caveat on ETDs: Be careful when entering an order. Many share ticker symbols with other investments listed on foreign exchanges. So be certain you are actually buying what you want to buy when placing an order.
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