By Roger Choudbury
Germany's GDP declined 0.25% in Q4 2011, signaling a slowdown in Europe. Additionally, Britain's largest export market is Europe, and exports from the UK fell by 1.5% month-on-month in November 2011. The euro has also tumbled to $1.27. China's real estate bubble has popped, and exports to Europe may be "falling off a cliff."
Wells Fargo also recently issued a cautious forecast of global GDP growth at 3% in 2012, which would be the slowest annual rate of growth since 2009. Moreover, Dr. John Hussman points out that in the past 10 recessions, payroll employment growth was positive in 8 of those 10 recessions in the month that the recession began. It is too soon to dismiss talks of a recession. This macroeconomic outlook may send you running to the hills, but good dividend yields may still help you come out unscathed.
It may be time to consider adding more fixed-income instruments to your portfolio. More particularly, I like preferred stocks because you can smooth out the bumps and erratic moves of the market through consistent dividend payments. Also, these debt instruments do not ebb and flow like common shares and equities. Keep in mind that companies aim to make the dividend payments to avoid credit rating downgrades.
Below, I focus upon preferred stocks that pay out higher based on higher interest rates. I also take care to mention those at or below par value, which is the dollar amount that you get after the security reaches maturity. Generally speaking, you should avoid preferred stocks that trade above par value, because you end up losing the gap between what you paid for and the call price. With the Fed targeting 0%-0.25% for the federal funds rate and slowing global economic growth, you ought to consider the following.
AEGON (NYSE:AEG) (Floating Rate Perpetual Capital Securities) became callable on December 15, 2010 at $25 per share, but it trades under $17.25 per share. When these shares are called, you can make up to 44.9% on capital appreciation. You get paid for your patience with a quarterly dividend payment, which is the greater of 4.00%, or the 3-month LIBOR plus 0.875% with a par value of $25 per share. This series has a good track record since its inception in November 2005, and has made all payments.
The next dividend payment is on March 15 to holders of record at March 1. Additionally, S&P rated this security as BBB. The current yield is 5.9%, and the 52-week trading range is $15.22-$23.92. The Yahoo Finance, Google Finance, and Fidelity ticker symbols are all AEB. I recommend this security for individuals that have a fixed-income portion of their portfolio, but not for investors that solely rely on dividends for income.
Bank of America (NYSE:BAC) (Floating Rate Non-cumulative Series 2) became callable at $25 per share on November 28, 2009. Here's a bonus: You can buy these shares at under $15 per share. When Bank of America decides to clean up its act, it may want to call these shares, and then you can make 66.7% in capital appreciation. Aside from that, the dividend payments are quarterly and amount to 3-month US dollar LIBOR plus 0.65%, but will not be less than 3.00% per annum.
These shares were first traded on March 9, 2005, and have made all dividend payments since inception. The next dividend payment is on February 28. Keep in mind that S&P rated this security as BB+. The current yield is 5.1%, and the 52-week trading range is $10.22-$17.86. The Yahoo! Finance ticker symbol is BML-PH, the Google Finance ticker symbol is BML-H, and the Fidelity ticker symbol is BML/PH. I would suggest this for more aggressive income investors who have a firm grasp of Countrywide's effect on the bank.
Goldman Sachs (NYSE:GS) (Floating Rate Non-cumulative Series A) became callable on April 10, 2010 at $25 per share, and trades below $19.25 per share. You have the potential to make 29.8% in capital appreciation when this series is called, but while you wait, you collect dividend payments. With a par value of $25 per share, the floating rate will be equal to the greater of 0.75% above LIBOR or a minimum of 3.75%. Since their inception in April 2005, all quarterly dividend payments have been made.
The next dividend payment is on August 10. S&P rated this security as BBB-. The current yield is 5.1%, and the 52-week trading range is $16.56-$23.45. The Yahoo! Finance ticker symbol is GS-PA, the Google Finance ticker symbol is GS-A, and the Fidelity ticker symbol is GS/PA. I would recommend this for investors that are looking for a reliable and relatively safe income instrument.
HSBC USA (HBC) (Floating Rate Non-Cumulative Series F) became callable at $25 per share on April 7, 2010. It trades below $17.25 per share, so there is room to make 44.9% in capital appreciation if these shares are called. This series also pays out a decent quarterly dividend equal to the 3-month LIBOR plus 0.75% of the stated value of $25 per depositary share, but will not be less than 3.50% per annum. These shares made their debut in April 2010, and have made all dividend payments since then.
The next dividend payment is on April 1. Also, S&P rated this security as A-. The current yield is 5.1%, and the 52-week trading range is $13.45-$23.50. The Yahoo! Finance ticker symbol is HBA-PF. This is the highest-rated security on this list, and I highly recommend it. Keep in mind that this is medium risk and offers medium reward if you select this.
MetLife (NYSE:MET) (Floating Rate Non-Cumulative Series A) became callable at $25 per share on September 15, 2010, and it trades near $23.75 per share. This does not offer a terrific capital appreciation opportunity, but you can own preferred stock from one of the largest insurance companies in the world. Not only that, you can collect dividend payments at the greater of 4.00% or 1.00% above the 3-month LIBOR rate, given a par value of $25 per share. This series came out in June 2005, and has made all dividend payments since inception.
The next dividend payment is on March 15. Additionally, S&P rated this as BBB-. The current yield is 4.2%, and the 52-week trading range is tight: $19.40-$25.00. The Yahoo! Finance ticker symbol is MET-PA, and the Google Finance ticker symbol is MET-A. This is another solid income opportunity, and income investors should seriously consider this.