A little-known security offers solid, and safe, yields.
Today I’ll be discussing an investment that not only brings income investors the desired high yields that they seek, but a high degree of safety along with it. These securities trade on the stock exchange, but behave more like bonds, yet they are not preferred stocks. They are so secure that, even in the event of a company bankruptcy, you are almost as likely to get your money than if you were a bondholder.
The securities are called exchange-traded debt, or ETDs, so named because they are debt instruments that trade on the stock exchange. Bonds can be difficult to trade, because you must have their identifying CUSIP number, which can often be a bear to track down.
Bonds can also be tricky to trade. The trading volume of bonds is not what it is with stocks, so getting a buy or sell at a desired price is not a guarantee.
Exchange-traded debt is akin to preferred stock, because it trades in a very narrow range like preferreds, provides dividend yields that are about the same as preferred stock, yet is ahead of preferred stock in terms of recovering your investment in the event of a bankruptcy.
ETDs distribute income quarterly, but these distributions are NOT classified as dividend income. They are classified as interest, and therefore are taxed as ordinary income. That’s the price you pay for that additional security, because your normal dividend stock is often taxed at the “qualified dividend rate” of 20%.
Therefore, the best place to hold an ETD is in a retirement account, where those taxes are deferred.
One other feature is that ETDs have call dates, which run from 10 to 30 years. Most are issued at $25 per share and callable at that same price. Preferred stock call dates tend to be just a few years out, so call dates are generally not paid much attention with ETDs.
Vornado Realty Trust PINES (NYSE:VNOD), also known as “Public Income Notes”, are debt traded on this famous commercial real estate investment trust. The company has vast holdings in New York and Washington D.C., in both the urban street retail space, and malls and strip centers. Its 100 million square feet of space also stretches into properties in the northeast, California and Puerto Rico.
The PINES trade at $25.50, only 2% above par, and yield 7.29%. The debt is rated BBB by S&P, which the rating agency translates as “Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.” To give perspective, there are only 3 levels above BBB, and eight levels below.
Barring a total retail and economic meltdown, this is safe debt.
Weingarten Realty 8.1% Notes (NYSE:WRD) is also a REIT, focusing on shopping centers in the southeast, southwest and west. Their centers are usually anchored by a well-known supermarket or retailer, and also owns undeveloped land. The common stock pays 4.8% but the BBB-rated ETDs pay 7.79% and trade at $20.80, only 4% over its $20 issue price.
Like Vornado, it would take an economic catastrophe to torpedo this ETD.
General Electric Capital 4.875% Notes (NYSE:GEH) is a more conservative choice, as it trades the debt of GE Capital, the venerable commercial and consume finance arm of the famous company. GE Capital is in very solid shape financially, so it is no surprise the ETD is rated AA+ by S&P, thereby saying it has “very strong capacity to meet financial commitments”.
I think you get a bargain by scooping it up at only $23.86, about 4.5% below par issue of $25. Because it trades below par, the yield is 5.11%. As price declines away from par, yield climbs, and vice-versa.
Duke Energy 5.125% Junior Subordinated Debentures (NYSE:DUKH) is a slightly different beast, in that “junior subordinated” means it essentially rests third in line in the debt stack. First in line are Senior Notes, then Senior Subordinated Notes, and then comes Junior Subordinated Notes.
The yield here is 5.4% and it trades at $23.71, or about 5% below par. It is BBB- rated, meaning it is “considered the lowest investment grade by market participants”. Translated, this means that the market is generally favorable about the debt because Duke Energy is a solid company. However, the market has more doubt and concern than it would about a BBB rated firm.
Lawrence Meyers does not own shares in any security mentioned.
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