The impressive gains in the stock market in the past five years have left many investors without sufficient income producing opportunities as dividend stocks have risen in value such that their once-robust dividends are now less remarkable. However, opportunities for significant current income are still abound and without the volatility we often see in common stocks.
JPMorgan Chase (JPM) is arguably the strongest large bank in the country in the wake of the financial crisis. The company has likely the best CEO in the business and makes enormous sums of money for shareholders. The common stock pays a respectable dividend but for those that are seeking more income with less volatility, they are forced to look elsewhere than the common shares. Enter the JPMorgan Chase Capital XXIX Securities Series CC (JPM.C, may differ depending on your broker).
This security functions as a preferred stock in that the subsidiary, JPMorgan Chase Capital XXIX, is issued subordinated debentures by the parent company, JPMorgan Chase, which then makes interest payments to the subsidiary and those interest payments are forwarded on to holders of shares of the subsidiary. In essence, this is a way to own JPMorgan subordinated debentures through a decently liquid preferred share type investment and receive the income from the interest payments the debt spins off.
The Series CC has a par value of $25 per share and currently trades for $25.63 as of this writing. This means the shares are trading for a 2.6% premium to their liquidation preference. Therefore, if one was to purchase shares today and assuming they were called, investors would see a 2.6% capital loss on their position.
These shares are cumulative, which means that if JPMorgan misses an interest payment, it must make it up the next time a dividend payment is made. In fact, with this security, dividend payments can be deferred for up to five years but at the end of that period, or upon redemption, are obligated to be paid. This is a risk to owning this type of security; if you cannot afford to wait for five years for your dividend payments, you may be forced to liquidate your shares without receiving the dividends you may be owed. The risk of this is low given JPM's fundamental strength but it is something to consider.
These debentures were issued for a term of 30 years and as such, the shares will be liquidated no later than April 2040. If JPM decides to liquidate these shares before that, it can decide to do so no earlier than April 2015 and it must do so at 100% of the liquidation preference. Thus, if between now and 2015 shares trade below the liquidation preference, investors could receive a capital gain assuming JPM redeemed the shares. However, as I stated earlier, if you initiate a new position now at a premium to the liquidation preference and JPM calls the shares, you will be subject to a small capital loss.
There are many positive traits regarding the Series CC. First, the shares have a robust current yield of more than 6.5%. Second, the company paying the dividends is likely the strongest bank our country has to offer, so than other places, your money is safer in the world of investing. Third, dividends, while having the ability to be deferred, are cumulative so as long as you hold for the long term, you are entitled to significant current income. Fourth, these shares are far less volatile than common shares. Of course, these are not subject to the same kinds of capital gains that are possible with JPM shares but we are also quite unlikely to see 50%+ drops in the value of these shares either. Finally, for long-term holders, this security isn't scheduled to be redeemed until 2040 so there is ample time to collect dividends. As an example, if JPM decides not to redeem these securities early and a position was initiated today, the holder would receive roughly $45 in dividend payments over the life of this security. In addition, you'll receive $25 when shares are redeemed, so it is easy to see how this security is a terrific source of stable, safe income for investors.