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All year long junky preferred stocks have outperformed quality preferred issues, but that doesn't mean that super quality preferreds paying a decent dividend should be ignored by income investors.

We like to have some of our portfolio in issues that we can buy and forget. The price will go down and the price will go up, but in the end we can count on a redemption at par (in this case $10/share).

For us the one issue that we have taken a liking to is the Tortoise Energy Infrastructure Corporation 4.37% Mandatory Redeemable preferred stock (Ticker: TYG-B). Tortoise Energy Infrastructure Corp. is a 2 billion dollar closed end fund. Closed end funds issue debt and/or preferred stock for use as leverage in their fund. While 4.37% isn't striking, there are overriding factors that are what we like to see in a conservative issue.

  • This issue has a mandatory redemption date on December 31, 2027 (at $10 - this is $10 issue).
  • The issue now trades with a current yield of 5.23% - and better yet a 6.12% yield to worst.
  • The issue pays dividends on a monthly basis - and a "bird in hand" is always better than in their pocket.
  • The issue is rated AA by Fitch.

Simply the premise with this issue is that if you bought it today and held it to redemption (assuming no early redemption -- it is redeemable starting 12/31/2015) with dividends, you would double your money.

So what if it is redeemed early? Today the shares are at $8.32/share, so a redemption means a near 20% return, and we think there is near zero chance of a redemption in the foreseeable future.

For those that do not understand or have not researched debt or preferred stocks of closed end funds, there are special rules that make these issues somewhat bullet proof. Tortoise must have asset coverage of 300% or more on debt and 225% or more asset coverage on preferred stock. Not a penny of distribution can go to the common holder if debt holders and preferred holders are not paid their interest or dividends. With the large asset coverage ratio required, debt and preferred holders are in a strong position to be protected. We wrote an article on Seeking Alpha a few years ago explaining Section 18 of the Securities Act of 1940 which governs leverage used by funds. This is why you see levered closed end funds using up to 35% leverage, but seldom more than that amount. Because of the safeguards that closed end funds must adhere to relative to leverage, it is less important to have a positive attitude on Tortoise Energy Infrastructure (TYG) itself and instead simply understand the preferred stock issue.

For those that find this an attractive issue, it should be noted that the price will go up and down like most interest rate sensitive issues, but the closer it gets to redemption the less it will have interest rate sensitivity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We have a position in TYG-B and may add to it from time to time.

Source: Our Favorite Conservative Preferred Stock - Tortoise Energy Infrastructure