Many investors look for yield in the usual places such as common stocks or bonds, and are often reaching for what many would consider subpar yields. In contrast, if we get creative and look outside the normal bounds of what investors comb through to search for income, we can discover some gems. In that light, this article will take a look at an issue from RAIT Financial (NYSE:RAS) that gives investors low volatility but also high yield.
That issue is the company's senior notes due 2024 under ticker RFT. This is an exchange-traded debt issue, meaning that it is debt in every sense of the word but instead of being traded in clunky, illiquid blocks of $1,000 or the like, it is traded in smaller ~$25 increments on a stock exchange. This provides investors -- particularly smaller retail ones -- to access the company's debt on a publicly traded exchange.
As I said, the issue matures in 2024, so there is a little less than 10 years of duration left on this issue before it is redeemed. However, it can also be called beginning in April of 2017 by the parent company, RAS, if it so chooses. Were that to occur, holders would get a flat $25 for each share they owned of RFT regardless of where the price was at the time of the redemption. Of course, no one knows if RFT will be called between 2017 and 2024 but understand that if you get long RFT, it could be called away from you if RAS chose to do so.
The notes pay a fixed quarterly dividend of 47.656 cents, good for a 7.625% coupon on the issue price of $25. Shares are currently trading for a 1% discount to issue price, so the current yield is a bit higher than the coupon on the issue. In the context of the issue potentially being called, a discount is great because it means you are protected against capital losses should a redemption occur later.
Unfortunately, since this issue is debt and not a preferred stock, it is ineligible for the preferential dividend tax treatment. This means that instead of distributions being taxed at the low dividend rate, interest received from RFT is taxed as income. This could be potentially material depending on what your tax rate is, so make sure you understand the consequences of this before taking a position in RFT. Of course, if you hold RFT in a retirement account, it doesn't matter in the slightest. And given that, I'd actually recommend that RFT be held in a tax-deferred account unless your taxes are low enough that it doesn't eat up too much of the interest you receive. This instrument probably isn't appropriate for a taxable account for higher-income individuals for this reason.
I'm fully aware there are many common stocks and in particular, REITs such as RAS that pay dividends that meet or exceed that of RFT, but where I think RFT has a place is for the investor seeking high yield but low volatility. REITs such as RAS experience periods of extreme volatility based on market news or company-specific events, and that is off-putting for some investors . RFT provides investors the chance to get a very nice yield, albeit as interest instead of dividends, but experience very little price volatility in the process.
The one caution I've got is that RFT is very low volume, usually trading less than a couple thousand shares per day, so if you decide to get long RFT, please make sure you do it in small blocks and that you use limit orders. Otherwise you could end up paying more than you'd hoped if you happen to choose a particularly low volume day. Other than that, RFT certainly isn't for everyone but has a place for a certain type of investor.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.