Bonds That Trade Like Stocks

Includes: AAL, AAR, CTL, FJA, PJL, PKH, VZ
by: Neil George

They look like stocks and trade like stocks - mostly on the New York Stock Exchange (NYSE). But they are actually bonds - not that most folks, including your broker, really ever notice.

Bonds are supposed to be for the big guys. You know - the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that continues to bring bonds within the reach of individual investors.

These mini-bonds look and trade just like regular stocks. And rather than being priced and traded like traditional bonds - with $1,000 face values traded in lots of tens of thousands or millions - these trade in more manageable quantities, with face values of 25 bucks or less.

Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have rather scary acronyms given by the banks that put them together and brought them to the market. But, behind the forbidding facades are some very investor-friendly securities.

Mini-Bond ABCs

I'll start with one of them called Trust Preferred Securities (TruPS). These have been quietly trading for quite a while, yet haven't been on most investors' radar because they're just not widely touted by anyone.

Behaving much more like preferred stocks, these securities arise from regular everyday companies, including big utilities and many other industries, which essentially issue them to bank holding companies. The holding companies then package them up as trusts and issue them to investors in the markets just like stocks.

The bank holding companies then use the funds to invest in bonds from the issuing companies. Those bonds typically have intermediate to longer maturities, and the cash flow from the bonds is what pays dividends on the TruPS.

The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the SEC, while the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds.

So the investor benefits from the steady dividends and the advantages and security of owning a bond, and the company gets access to cheaper after-tax capital.

There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINEs (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.

But what makes them all similar is that they're issued in sums typically amounting to 25 dollars, with calls by the issuing company at their issuance price - again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TruPS and then know the yield to the call price as well as the call dates.

The result is that you and I can put together a group of these bonds from a variety of industries that pay us quite well - with yields running for most from 7 percent to over 14 percent.

And even better, even though these trade like stocks on the NYSE, they tend to be very steady in price - even when the stock market is in a tizzy of trouble - mostly because nobody in trading rooms or hedge funds knows about them. And that's perfect for us.

One more thing to note: Because they are brought to the stock market by banks, some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don't get spooked - just look behind some of the names on the stock tables to find the real issuer.

How about some examples of these bonds that trade like stocks?

Mini-Bond Favorites

I'll start with an easy one from the giant US telecom company: Verizon (NYSE: VZ). The A-rated issuer has a TruPS trading under the symbol of PJL on the NYSE, with a dividend of 7.625 percent due in 12/01/30.

Trading pretty consistently just shy of the 25 buck range, the yield is running currently at around 7.8 percent. I see this paying you a steady and solid dividend rate that trumps the dividend from the common stock and the regular bonds by a whopping margin.

Next is an issue with a bit more in yield from another telephone operator with regulated phone lines based in the Kansas side of Kansas City in Overland Park. Embarq has its 7.1 percent due 06/01/36 TruPS which trades on the NYSE under the symbol of FJA . The bond continues to trade a bit more up and down than the Verizon issue in mid to upper teens - giving us yield at a great value.

The result is a current yield for FJA nearing 10 percent, payable every June and December. A newer issue, it's not callable until June of 2012, which would be a huge gain for you at the current price in the market.

Verizon isn't the only baby-bell to go to the NYSE for some of its bond issuance. Qwest (NYSE: Q) has had a pile of challenges - but still maintains an impressive chunk of telecom assets in a crucial section of the US market.

I see the credit prospects of this utility being good enough to sustain the cash coming from the company's TruPS trading under the symbol PKH . The bonds are the 7.75 percent due 02/15/31. They continue to trade positively - in the mid- teens dollar range. Callable like the others at 25 - so we have only upside if that were to occur. The yield therefore is a big one: currently over 12 percent.

Last up in my examples of these stocks that pay you comes from my favorite airline holding company: AMR (NYSE: AMR).

The holding company for AMR has a PINE trading under the symbol AAR, paying 7.875 percent. Trading around $13-$14 apiece, they're generating another huge yield of over 14 percent.

And while many might question the stability of owning a bond from an airline, note that AMR continues to pay its bills, and has continued to prove that it can rollover credit lines and bonds and has continued to have ample access to new leases and other new lines of credit.

Disclosure: No positions