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My Watch List for 7% Yields – Part 2

This is the 2nd of 3 little articles which name preferred stock or baby bonds which I believe have the potential to reach a share price which will result in a 7% current yield. This is the target current yield. My preference is that they are mid quality or better (and every one has there own definition of mid quality).

As most of you know I have owned term preferreds and short dated baby bonds for the last few years–in quantity. I am adjusting what I buy a bit by adding more perpetual issues with tasty yields while maintaining substantial short dated maturity issues. Today 7% or better is my target, but that can adjust as time goes by. I have sustained some capital loss by owning some perpetuals, but it is only about 2% and I can live with that for now.

At this moment I own bunches of ‘term preferreds’–virtually all of them except I own only a couple of the Priority Income Fund term preferreds. All the term preferreds and baby bonds with short dated maturities can be found here. It is a fair assumption that I am watching all of them, but I don’t expect they will attain a price which gives me a 7% current yield–if they fall that far in price I will be a likely buyer (adding to positions).

I like Pebblebrook Hotels (PEB)–one of the most financially strong Lodging REITs. Obviously with Covid they have taken a spanking, like all lodging companies. The company has a 6.375% perpetual (PEB-E) which is trading at $23.50 for a current yield of 6.78%. They also have a 6.50% issue (PEB-F) priced at $23.57 for a current yield of 6.68%. Both issues are currently callable.

For years I have liked monthly payers and Armour Residential Mortgage (ARR) has had a 7% monthly payer outstanding for a number of years (ARR-C). The issue is now trading at $24.45 for a current yield of 7.15%. I own this issue.

There are 2 perpetual preferreds outstanding from UMH Properties that may be attractive. The UMH-C 6,75% issue which has an early redemption date starting in July, 2022 is now trading at $25.09 for a current yield of 6.73%. The UMH-D 6.375% issue is trading at $25.38 for a current yield of 6.28%–the early redemption date doesn’t start until 1/2023.

Qwest Corp has 2 baby bonds outstanding–CTBB has a 6.50% coupon and a current yield of 6.53%–trading at $24.86 and is currently callable. CTDD has a 6.75% coupon and currently is priced at $24.99 for a current yield of 6.75%–it becomes redeemable 6/15/2022. I don’t own these but may own some very soon–these are split investment grade. One or both of these could be called soon–but at these share prices no financial harm would be done.

That’s it for now.

24 thoughts on “My Watch List for 7% Yields – Part 2”

  1. Given the number of comments in this chain about Lumen (LUMN) Technologies and the legacy Qwest baby bonds, this seems like it might be a reasonable place to park a comment about CTBB and CTDD. (Disclosure, I opened a position in CTDD on Friday October 14, 2022.)

    Here’s the thought process I went through in buying CTDD:

    * CTBB closed October 14, 2022 at $17.49 for a 9.29% yield
    * CTDD closed October 14, 2022 at $18.39 for a 9.17% yield

    * Previous CTDD lows:
    $18.06 December 21, 2018
    $16.99 March 20, 2020

    * Ratings as of 2022-09-05 per Quantum Online: B2 (Moody’s); BB- (S&P), so definitely on the more speculative scale for the mostly IG-focused crowd around here (I note that Tim characterized these in his opening paragraphs up above as “split investment grade”).

    * I am a happy CenturyLink land line + fiber customer (and I pay ’em every month); family has two other land line + DSL CenturyLink accounts, we’ve been reasonably happy with price, functionality, and performance.

    * I am prepared to like the new LUMN CEO Kate Johnson – she’s an ex-CEO of Microsoft US, with experience at GE and Oracle. (Microsoft of course has a real love / hate reputation here in Seattle – I lean towards the “home town heroes” side of things, but I’ve also struggled through days-long Windows NT installations!)

    * I think it’s reasonable to predict that the LUMN dividend will be cut before too long, making these notes safer
    So that was the thought process and rationale for buying CTDD last Friday. CTBB has a slightly higher yield, more shares outstanding and hence more daily volume, but I chose CTDD since it has traditionally traded higher than CTBB.
    (Tim, you may want to rename this thread to “My Watch List for 9% Yields”!)

    1. Since I posted this note on the Lumen / CenturyLink / Qwest bonds CTBB and CTDD in mid-October, I’ve been watching their trading activity fairly carefully. It looked like there was a large seller in each issue for the last part of October, and the price reflected that. Yesterday at the close there were two large transactions in each issue – 479,630 shares of CTBB, and 320,148 shares of CTDD – both taking place at 16:00 Eastern time.

      I’m guessing (hoping?) that was the conclusion of the selling of the Qwest bonds by the fund that owned them. From what I can tell, it was *NOT* the preferred share ETF PFF that was selling them – they still own a healthy slug of each issue as of yesterday (3M+ of CTBB, 2M+ of CTDD).

      Simply FWIW.

      1. @ESW3 thanks for the reminder. At the current CTDD price range $18-18.50 (missed the $17 range) the yield is 9%+. The risk/reward looks ok to me so I added a little.

    1. Hi Randy–I bought a taste today as well–not going to make my 7%–but darned close.

      1. I have both my sons and daughter in laws subscribing to investment companies to help me get 6 % or better returns. Otherwise, mom and dad are moving in….lol. Good investing to all!

        1. Hahaha. If betterinvestment performance would have stopped my parents from moving in, they would have had better returns than Warren Buffett….

  2. Landry said on the November conference call they intend to call the UMH-C and D.
    “Our access to capital at attractive rates has never been better. This reduced cost of capital through both the equity and debt markets will allow us to drive additional FFO growth through investment internally and externally. It will also help us to redeem our outstanding $247 million of series C 6.75% preferred stock in July of 2022 and $215 million of our series D 6.375% preferred stock in January of 2023. Reducing our cost of capital on these preferred series could result in additional $0.20 to $0.30 per share, depending on the percentages and rates of equity and debt utilized for the redemption. The redemption of our preferred stock combined with our ability to continue to grow earnings organically and increased property values positions UMH to outperform in the coming years.”

  3. Why monthly payers? ARR-C is a good one either way but monthly appeals to those who want steady income. So there’s probably a small premium baked in to the price. If you own enough things you’ve get money coming in all the time anyway.
    Maybe I’m just biased because the dividend captures are too small.

    1. I picked up 400 shares @ 24 today at the close. We’ll see… but 7.3% yield paid out monthly seems pretty attractive.

  4. I have been thinking too, why not add a few high quality perpetuals to my BB short term portfolio. I have been looking at DDT (7.2% coupon) BBB- , parent Company DDT. It is a fashion apparel, cosmetics and home furnishings company mostly recession resistant industry.

    Gotta love the 4.3B market cap and strong balance sheet, EBITDA $1.B over $600M total debt. Dividend coverage over 4000% and payout ratio at 2!! And what’s not to like with free cash flow of $900M! Huh can this be real?

    Its trading at $26 and just took a .25 drop last trade day…and may buy a little Tuesday.

    I think there is more room to drop with rates going up in the next 2-3 months. If I can be patient, I may have a apatite to be greedy.

    1. I don’t think DDT is BBB- According to QOL it’s a B- Quite a difference. Saying that, I own DDT and I’m comfortable with it.

    2. I saw that Dillard (DDS) is gradually being taken private (again). If so, will the note (DDT) be called soon? Hate to lose the $1 on the price. That is a little more than two dividends so maybe worth a shot? DDT is below investment grade (Ba1).

  5. GM Tim…the parent company of CTBB and CTDD is Lumen Technology Inc. (LUMN), which has a large and complicated credit structure involving holding multiple operating companies and classes of debt. In that context it seems unlikely to me these baby bonds with 30 years to maturity will become a redemption priority anytime soon.

    1. Respectfully disagree. All of the other Qwest issues were called and refinanced at much lower rates and even with rising rates still better than these bonds.

    2. Citadel–actually that would be great. I did notice glancing at there most recent 10Q that about 30% of their assets are ‘available for sale’–so guess they will eventually become a much smaller company.

    1. Jos–I will probably buy a tiny bit this week–at a little less than my 7% target.

      1. Tim, I own some LUMN common stock, which currently continue to pay $0.25 per quarter. CEO Jeff Storey hailed from the then Level 3 Communications when Quest / Century Link acquired Level 3 after paying premium plus (market believed the aging communication co. paid way too much). It was then around $22 to $24 stock with Morningstar analyst believed it was undervalued. Many including me, bought some around $20. After the first quarter Storey along with the then CFO announced fantastic earnings and FREE CASH FLOW. Stock jumped up, all the baby bonds followed (above $26). I sold all my higher yielding baby bonds and reinvested in real bond callable with one long duration. I learned that bond from someone at YOUR wonderful website. The next quarter CEO anounced reduction of dividend by one half, contrary to his “first quarter promise: dividend is safe). Common stock down. To summarize, this company has reduced the debt by taking advantage of years of Fed fund interest decline via refinancing substituting with considerably lower debts all sold to institutional investors. PROBLEM is: continuing losing revenue of the legacy biz, sold a big chunk of it (good BUT the future revenue loss could exacerbate the revenue some more. The new enterprise biz, with miles of underwater cables, presumably valuable deemed by most AND its large competitors have increasing revenue, insufficient to neutralize the loss of the old biz. Many old investors were upset because Storey continue to reward himself and his executives with lots of stock options plus perhaps some cash. Maintenance cash plus enterprise investment cash plus dividends AND stock buy backs have all been promised and announced by CEO and CFO. Many SA articles with readers commenting on both sides. I sold some of my daughter’s commons but keep all the others. Both intermediate and long bonds are still being held. I believe in selling these appreciated bonds could result in OID sort of tax treatment. I do believe that the credit risk for the baby bonds you are contemplating are SAFE.

        1. Correction: LUMN has miles of Dark Fiber (not Cable), which presumably is less demanding than land internet for 5G and 6G. It seems that the problem that it takes time for the enterprises to switch. They got some government contract such as from the US Postal Service (10 year) but the yearly increase income is minimal as percentage of total revenue.

          1. Many may know this already but I’m happy to have a chance to contribute here: fiber optic cable transmits information in the form of pulses of light and ‘dark’ fiber is essentially ‘unlit’ capacity.

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