High rates of income have been difficult to achieve in the past few years as ZIRP and NIRP have overtaken the world's largest central banks. With rates being persistently low the malaise for income investors has certainly spread to financials, which have come under the boot of regulators in terms of returning capital. But the iron fist of stringent capital requirements has made financials - like Goldman Sachs (NYSE:GS) - safer than they've ever been and that is great news for holders of their debt. We'll take a look here at once such issue that is currently trading well in excess of a 6% yield.
The issue in question is the Series 2011-1, $25,000,000 6.75% Callable Class A Certificates and while that name is one only a banker could love, it's really quite simple. GS issued $25M in debt as a trust preferred security that trades on the NYSE under ticker TFG. The mechanics of the legal entity don't matter; you're buying GS debt. And for that purchase, you receive a handsome yield but there is a bit more to it.
Before we get to the yield, owning a trust preferred is essentially like owning debt. That means the distributions are characterized as interest and not dividends, so if you own TFG in a taxable portfolio, that could potentially have consequences. Of course, if it is owned in a tax-deferred portfolio, it doesn't matter in the slightest.
In addition, the notes were issued in $1,000 increments but trade as certificates issued at $25 each. Essentially, owning one certificate means you own 1/40 th of a subordinated note issued by GS. This is to increase liquidity of course as issues that trade at their $1,000 issuance price have scarce buyers around. And speaking of liquidity, it's actually quite good for TFG assuming you aren't buying 20K shares at a time; days of 5K+ shares trading hands are pretty normal. While that level of volume is paltry compared to common stock, debt issues just don't change hands as often.
TFG was issued in 2011 and has a call provision such that GS can redeem it starting in October of this year for $25 and while that's not necessarily a positive, the ill effects of it would be quite limited were it to occur. First, redeeming securities like TFG right at their first call date is highly unusual and as such, the likelihood of this one being called anytime soon is probably low, although only GS knows for sure. However, if that were to happen you'd receive $25 per certificate you owned irrespective of the then-current price. At today's price of $25.50, you'd be out 50 cents per certificate. That's not great but it is a 2% capital loss. However, if GS makes even one interest payment between now and redeeming the security, that loss will have been offset more than entirely by the semi-annual coupon. In addition, should the issue ever be redeemed, you're entitled to whatever accrued interest hasn't been paid. Since the next coupon payment is due in October anyway, you'd be due more than 50 cents in accrued interest.
Speaking of the coupon, that rings the register at $1.6875 annually, or 84.4 cents every six months per certificate. That amounts to a 6.6% current yield at today's certificate price, or more than four times what GS common shares pay at the moment. That's a robust yield and while I'd prefer quarterly payments to semi-annual, the 6.6% yield is very strong indeed.
In addition, the issue has a BBB+ investment grade rating as GS' balance sheet continues to improve. The strict regulations the Fed and others have placed upon large financials has crimped returns but made their collective ability to service debt much better. GS has little to no default capability anytime soon and likely for the life of the note, which is set to mature in 2037. At that time you'll get your $25 per certificate back plus any interest you're owed but in the interim, you can collect up to 21 years of $1.6875 annual payments on your certificates.
Debt investing isn't for everyone but this issue offers investors the chance to own debt from a very seasoned, investment grade issuer that yields 6.6%. In addition, since it trades on an exchange with decent volume, this issue is relatively easy to get in and out of. Or, you can hold it for the next 21 years and collect $1.6875 annually over that timeframe. If you're looking for a high yield from a safe issuer, you can certainly do much worse than TFG.
Disclosure: I am/we are long GS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.