A Safe 7.4% Yield From A Leading Telecom

| About: Verizon Communications (VZ)
This article is now exclusive for PRO subscribers.

Verizon's (NYSE:VZ) common stock pays an ample dividend for holders seeking income. However, VZ's common suffers from the same affliction all common stock suffer from; market risk. In the search for a stable yield, you can do much worse than VZ common stock. However, I also believe you can do better. Enter the Preferred Plus 7.625% Global Certificate (PJL). This is an interesting security that I believe can help income investors achieve a more stable source of robust income than owning common stocks, including VZ. In this article, we'll take a look at PJL to see if it has a place in your portfolio.

We'll start by defining exactly what PJL is. This security is a third party trust preferred, which means basically that a trust issues shares and then uses the proceeds to purchase debt from Verizon. In essence, by owning PJL, you own Verizon debt. These securities were issued at a price of $25 per share which entitles you to an annual dividend rate of $1.90625 paid semiannually. At the issue price that is a very strong 7.625% yield and with shares trading at a small premium to that amount as of this writing at $25.65, the current yield is still 7.43%.

There are a few things to keep in mind with PJL before jumping in. First, the payout from this security is interest and not dividends, rendering it ineligible for the favorable dividend tax treatment. This could be a significant negative in a taxable account as it could potentially substantially reduce the after-tax yield of this issue. However, in a retirement account it shouldn't matter. I would suggest that if you want to be long PJL you do so in some sort of retirement account to avoid the interest treatment of the payouts for tax purposes.

Second, as I said, it only pays out semiannually. Again, if you're holding this long term in a retirement account it probably doesn't matter but if you are relying on this income for your living expenses it could potentially be another negative. It depends on your situation and PJL certainly isn't for everyone but it is something to keep in mind.

Third, the issue is trading at a slight premium and with this issue trading past its call date, it could be liquidated by Verizon at any time. If that were to happen holders would be subject to a 65 cent per share capital loss as the issue trades over its call price at present. This isn't a huge price to pay but buying a debt instrument at a premium opens up this type of risk. In fact, this issue was partially called earlier this year so it is a real possibility Verizon won't want to continue to hold this. However, if it planned to call the rest of this security it seems to me it would have done so already. Of course, there is no way of knowing so that is something to definitely be aware of. The issue is set to mature in 2030 regardless of whether Verizon calls it or not so this is not a perpetual preferred security; it is a true debt instrument that will cease no matter what in 2030.

PJL offers investors a chance to essentially buy Verizon debt on an exchange like an ETF or common stock. This allows retail investors to trade in increments of $25 instead of $1,000 or more for traditional debt issues and allows for more liquidity and flexibility. PJL also offers a great yield with the caveats of interest payment tax treatment, semiannual payouts and the potential the issue will be called. If you can get past those three relatively minor issues, I believe PJL can offer your portfolio a tremendous boost of income and from a very safe source. The issue is currently rated A3/A- by Moody's and S&P, respectively, so it is a high quality debt instrument. If you can get past the quirks of PJL it could be the jolt of income your portfolio needs.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.