Bonds That Trade Like Stocks

They look like stocks and trade like stocks - mostly on the New York Stock Exchange (NYSE). But they are actually bonds - not that most folks, including your broker, really ever notice.

Bonds are supposed to be for the big guys. You know - the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that continues to bring bonds within the reach of individual investors.

These mini-bonds look and trade just like regular stocks. And rather than being priced and traded like traditional bonds - with $1,000 face values traded in lots of tens of thousands or millions - these trade in more manageable quantities, with face values of 25 bucks or less.

Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have rather scary acronyms given by the banks that put them together and brought them to the market. But, behind the forbidding facades are some very investor-friendly securities.

Mini-Bond ABCs

I'll start with one of them called Trust Preferred Securities (TruPS). These have been quietly trading for quite a while, yet haven't been on most investors' radar because they're just not widely touted by anyone.

Behaving much more like preferred stocks, these securities arise from regular everyday companies, including big utilities and many other industries, which essentially issue them to bank holding companies. The holding companies then package them up as trusts and issue them to investors in the markets just like stocks.

The bank holding companies then use the funds to invest in bonds from the issuing companies. Those bonds typically have intermediate to longer maturities, and the cash flow from the bonds is what pays dividends on the TruPS.

The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the SEC, while the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds.

So the investor benefits from the steady dividends and the advantages and security of owning a bond, and the company gets access to cheaper after-tax capital.

There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINEs (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.

But what makes them all similar is that they're issued in sums typically amounting to 25 dollars, with calls by the issuing company at their issuance price - again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TruPS and then know the yield to the call price as well as the call dates.

The result is that you and I can put together a group of these bonds from a variety of industries that pay us quite well - with yields running for most from 7 percent to over 14 percent.

And even better, even though these trade like stocks on the NYSE, they tend to be very steady in price - even when the stock market is in a tizzy of trouble - mostly because nobody in trading rooms or hedge funds knows about them. And that's perfect for us.

One more thing to note: Because they are brought to the stock market by banks, some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don't get spooked - just look behind some of the names on the stock tables to find the real issuer.

How about some examples of these bonds that trade like stocks?

Mini-Bond Favorites

I'll start with an easy one from the giant US telecom company: Verizon (NYSE: VZ). The A-rated issuer has a TruPS trading under the symbol of PJL on the NYSE, with a dividend of 7.625 percent due in 12/01/30.

Trading pretty consistently just shy of the 25 buck range, the yield is running currently at around 7.8 percent. I see this paying you a steady and solid dividend rate that trumps the dividend from the common stock and the regular bonds by a whopping margin.

Next is an issue with a bit more in yield from another telephone operator with regulated phone lines based in the Kansas side of Kansas City in Overland Park. Embarq has its 7.1 percent due 06/01/36 TruPS which trades on the NYSE under the symbol of FJA . The bond continues to trade a bit more up and down than the Verizon issue in mid to upper teens - giving us yield at a great value.

The result is a current yield for FJA nearing 10 percent, payable every June and December. A newer issue, it's not callable until June of 2012, which would be a huge gain for you at the current price in the market.

Verizon isn't the only baby-bell to go to the NYSE for some of its bond issuance. Qwest (NYSE: Q) has had a pile of challenges - but still maintains an impressive chunk of telecom assets in a crucial section of the US market.

I see the credit prospects of this utility being good enough to sustain the cash coming from the company's TruPS trading under the symbol PKH . The bonds are the 7.75 percent due 02/15/31. They continue to trade positively - in the mid- teens dollar range. Callable like the others at 25 - so we have only upside if that were to occur. The yield therefore is a big one: currently over 12 percent.

Last up in my examples of these stocks that pay you comes from my favorite airline holding company: AMR (NYSE: AMR).

The holding company for AMR has a PINE trading under the symbol AAR, paying 7.875 percent. Trading around $13-$14 apiece, they're generating another huge yield of over 14 percent.

And while many might question the stability of owning a bond from an airline, note that AMR continues to pay its bills, and has continued to prove that it can rollover credit lines and bonds and has continued to have ample access to new leases and other new lines of credit.

Disclosure: No positions

Comments

[Jasper M:]

I am stunned at the author's contention that "Bonds are supposed to be for the big guys."
1) T-notes (kind of an archtypical bond, don't you think?) trade in multiples of $1,000 - hardly indigestible, to pretty much Any investor.
2) And even if they were, there are plenty of bond ETFs available.
3) I cannot counted myself among "the mega financials, insurers, pension funds . . . ", And yet I made, lessee . . . 22% in Treasury Long Bonds, since 2006. (NOT, I stress, a strategy I recommend just now)

I find nothing in the author's description that makes the described instruments attractive. They are derivative (not always a bad thing, but concerning), and their 'advantage' appears to be based on accounting tricks -
"The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the SEC, while the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds."

Since this is the sort of treatment that the agencies involved can probably change with an administrative ruling, I would be wary of chasing such constructs.

Jun 21 04:41 AM

[Pastano:]

Any other down sides?

Jun 21 10:09 AM

[mdpath:]

If these instruments are so attractive why don't you own any of them?

Jun 21 10:10 AM

[RLLH:]

I can certainly attest to the down side for the auto companies. Thanks to Obama, the "safe" bonds were offered 10% of a worthless auto company for GM. The Ford ones were better, but as in bonds best prepare to lose it all. But then I guess the same applies to stocks.


On Jun 21 10:09 AM Pastano wrote:

> Any other down sides?

Jun 21 02:19 PM

[alexnwba:]

I purchased several mini bonds that the author recommended in September and October of last year. (JBI, PHJ,MJY) All are paying substantial dividends/interest and all are up over 15% since he made the call. All still have a lot of growth left in them and I get the dividend/interest payments as they grow. It is a good conservative investment strategy for someone who wishes to protect a portfolio.

Jun 21 03:16 PM

[skwestorange:]

"Any other downsides?"
Yes one big one, the underlying bonds are mostly junior unsecured debt that get totally if not almost wiped out in bankruptcies, witness HGM, XGM, GPM and so on.

Jun 21 03:54 PM

[southgent1951:]

The author is confusing Trust Preferred issues with Trust Certificates. Both PJL and FJA are Trust Certificates. In the Trust Certificate form of ownership, a Grantor Trust is created, and an independent trustee is appointed to administer the trust. A bond from a single issuer is deposited into the trust. When investors buy the Trust Certificate PJL, they are buying an undivided interest in the assets of that Trust, a senior bond from Verizon Global Funding which is guaranteed by Verizon. tennesseeindependent.b... While PJL contains a senior bond from Verizon, the other Trust Certificate mentioned by the author,FJA, contains a senior bond from Embarq which is in the process of being acquired by another phone company. tennesseeindependent.b... I own both of these Trust Certificates. While some Trust Certificates contain junior bonds called Trust Preferreds, many contain senior bonds from seasoned investment grade companies as their underlying securities. I have been discussing both Trust Certificates and Trust Preferred issues in my blog since I started it about nine months ago. My Gateway Posts for these topics, which contain links to my relevant posts, can be found at : tennesseeindependent.b...
tennesseeindependent.b...

These type of securities are just a convenient way to buy individual corporate bonds. I would categorize them as exchange traded bonds, and there are three broad categories of these bonds. tennesseeindependent.b... If you want to buy a corporate bond directly in the bond market, which I also do, then you generally have to play with more money. (example: the Verizon bond mentioned above is trading now at over the 100 par value. So if I wanted to buy 5 of those bonds, it would cost me over $5,000 (1 bond =$1000; one bond priced at 108 would cost $1,080; 5 bonds at 108=$5,400 and so on) (quotes on underlying bond in PJL can be found at: cxa.marketwatch.com/fi... ) I could buy just 50 shares of the TC PJL which trades on the stock market, or whatever size I am comfortable with buying, at slightly below the $25 par value.

Many of these securities have been volatile since October, but have recently become more stable in price. So I would disagree strongly with the author's comment about stability in prices being some kind of constant. Since individuals trade this market, their panic can create volatility, as it did last October when I picked up an AT & T TC, JZE, at 50% of its par value. tennesseeindependent.b... Or, as two other examples, a TC containing a Prudential senior bond, JZH, at $9.75; or a TC containing a First American senior bond at $7.2.tennesseeindependent.b.... Frequently, during panics in the stock market, an investor has been able to buy many of the Trust Certificates to yield anywhere from 2 to 5% more than the underlying bond as traded in the bond market. The yields of the underlying bonds can be found at the FINRA site:tennesseeindependent.b...

I noticed a comment about buying treasury securities. An individual can establish an account directly with the Treasury under its Treasury Direct Program and buy treasuries at auction with small minimums. I am allowing mine to mature without rolling them over due to the very low rates being offered now (a ten year treasury note is around 3.7% now and T Bill are close to zero).

Another comment talks about bond ETFs without mentioning the disadvantages of that form of ownership. tennesseeindependent.b... This is a link to the advantages and disadvantage of BND, an ETF for the total bond market.

Jun 22 08:37 AM

[user396040:]

I have done well with AFC (publicly traded bonds in Allied Capital) and FSB, FSE, FSF group of bonds (bonds of Financial Security Assurance - with a name like that how can you go wrong!!). These are not for the faint of heart as a chart will reveal. But there are opportunities in this area for the nimble.

Jun 23 02:02 PM