The search for yield has been ongoing for many investors for the past several years as interest rates at or near the zero level have taken their toll. Dividend stocks have been bid up aggressively and yields are - in many cases - below historical levels. However, that doesn't mean one needs to give up and settle; there are still ways to invest in very high quality companies and achieve stronger yields than what common stocks offer.
One such way is via investing in a company's debt and in this case, as the logo above gave away, we are talking about GE (NYSE:GE). Specifically, we're talking about an exchange-traded issue that goes by the ticker of GEK. This is a way to invest in GE's debt but via a much more liquid, smaller package than what you'd normally think of for bonds, which trade in $1,000 or higher increments and aren't exactly heavily traded. While volume in GEK certainly doesn't reach anything close to the common stock, it is plenty liquid enough that bid/ask spreads are very reasonable and one can build a huge position in a short period of time. So what is GEK?
GEK is an exchange-traded debt issue, which just means it is traditional debt like any other bond, but that it trades on the NYSE like a stock. This has certain benefits including a $25 par value (instead of $1,000 or more) and much higher liquidity than other bond issues. GEK trades roughly 50k units per day, meaning that if you want to build a position, it is very easy to do so and you don't get taken to the cleaners on wide bid/ask spreads. That's a huge advantage over a traditional bond exchange and it makes GEK and others like it much more attractive, particularly to smaller investors.
The underlying debt security is a 2013 issue that matures 40 years from the issue date, so this is a long term issue to be sure. The only thing that could throw a wrench in that sort of buy-and-hold strategy is that GE has the right to call GEK at any time starting in May of 2018. That's just over a year away so if GE were to decide that it wanted to call GEK, it could certainly do so 14 months from now at a price of $25 per unit. That is the only real risk I see to owning this issue right now and to be honest, it isn't really a big deal because of where it is trading.
GEK is trading for a few pennies over the $25 mark right now, meaning that if it does get called, you're potentially on the hook for a diminutive capital loss. Other exchange-traded debt or preferreds that are trading well in excess of the par value offer investors a special kind of call risk but if you buy GEK and it gets called, you take your distributions for the year and your $25 per unit and go buy something else. While a minor annoyance, there's no real risk involved from a loss perspective.
The actual issue itself, like I said, is a 40 year note that matures in 2053 if GE decides to let it run. It pays $1.175 yearly in quarterly installments, which creates a 4.7% yield at $25. Like I said, it is trading for right at $25 now so the current yield is also 4.7%. That's much higher than GE's common stock, which is yielding a respectable 3.2% at this point. However, GEK is much more stable in terms of its price action than the common stock and of course, if you are looking for income primarily, GEK is miles ahead of GE and most other commons, for that matter.
GEK was reiterated at A1/AA+ in March of last year so it is a strong issue and besides, we all know GE and its financial strength at this point. This isn't the GE that nearly blew up during the financial crisis and while I've been critical of the common stock's valuation and growth potential, if you're looking to lend money to a company, there aren't many that are better. And keep in mind that lending money to a company and buying its common stock are completely different animals; just because I don't like the common at these levels doesn't mean I can't like its debt.
So there you have it; if you want to lend GE money you can do so at an attractive 4.7% yield that could be around for many years to come. GEK is cheap enough to service that I'm not convinced GE would want to call it but it also offers a nice yield for holders. If GE does let GEK run it would be a great long term hold for an ultra-safe, high-yielding security that offers stability and income you can't really find with common stocks. For a high-quality bond issue, GEK is about as good as it gets in terms of safety and stability.
Disclosure: I/we 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.