Innovative Income Investor | Innovative Income Investor

Targeting 12% in the next 12 Months with This Investment Grade Preferred

I’ve started digging for issues where I believe I can garner at least a 5-6% capital gain and a 6-7% dividend while waiting for a year. The issues that I currently hold have probably maxed out a large share of their capital gains and are limited to the coupon return as we move down the road.

For instance I hold a position in the Affiliated Managers 5.875% subordinated note (MGR) which is trading right at $25/share and I have a 12% capital gain in the position. Obviously my yield on my cost is somewhat higher as I bought some shares at $20.59, but regardless any gains from this point forward are limited to 5.875%. Certainly shares can move higher, but I believe this issue will remain somewhat pinned to $25 as it is a target for being called if interest rates continue to move lower.

I have just bought the Brighthouse Financial 5.375% perpetual preferred (BHFAN) just now at a cost of $20.80/share for a current yield of about 6.5%. I am looking for this issue to move to the $22/share area over the course of the next year–a realistic goal I believe for an issue that is a split investment grade issue (BBB- from S&P).

Note that the Affiliated Managers baby bonds are in my sock drawer–but regardless they could be sold if it moves a bit higher.

The bottom line is that in order to move my returns up I need to add a bit more risk—so I will be looking for issues that I believe give me that 12% (more or less) potential for the next year.

Lots of Macro Crosscurrents

So today while it should be a quiet market–both equities and interest rates as employment numbers are waited on instead we have markets tumbling. The S&P500 is off by more than 1%. The 10 year treasury yield is tumbling –down 9 basis points to around 3.70%.

There should be almost no doubt that the main reason for the selloff today is the dock worker strike and the potential negative effects that could have on employment and potentially inflation.

The other macro factor is the Middle East war situation–in my mind Iran will eventually step into the fray. While thus far their words have been bluster, they will step in to prove they are not a paper tiger. I hope I am wrong on this, but it seems inevitable.

So what does this mean to me? Nothing at the time–reacting to these macro factors AT THIS TIME would be a mistake. Certainly eventually they may be meaningful to the long term investor now is not that time. Preferreds and baby bonds today are fairly flat with 50% of issues up and 50% down (more or less)–no action to be taken.

2 Interesting Redemptions Announced

Today we had 2 issues of preferred stock called for redemption. 1 was a mandatory call the other a fixed-to-floating rate preferred.

RiverNorth Capital and Income Fund (RSF) announced that they would redeem the 5.875% term preferred on 10/31/2024–which is their mandatory redemption date. This is one of the most misguided closed end funds that exists–going through 3 names changes and multiple investing goals over the last 7 years. I owned this term preferred since the date of issue in 2017, but had sold it in the last month or two to generate so cash to invest elsewhere. I anticipated that the fund would be selling a new term preferred to generate funds for this redemption but this far nothing has been announced. AFTER this redemption the fund will have assets of around $67 million (using 6/30/2024 financials).

Also today FTAI Aviation (FTAI) announced they would redeem their 8.25% fixed to floating rate preferred (FTAIP). Shares have just become floating with 3 month SOFR plus a fixed spread of 6.886%–no wonder they wanted to call it. FTAI was able to sell a private debt offering this week at 5.875%. The company has 3 other high coupon fixed to floating or fixed rate reset issues outstanding.

Headlines of Interest

Below are press releases from company’s with preferred stock and/or baby bonds outstanding–or just news of general interest. News will be rather slow until the the end of the quarter and start of earnings season in early October.