I try to watch the coverage ratio that each of the closed end funds (CEFs) have on their ‘senior securities’. As most of you know CEFs have to have a coverage ratio of at least 200% on their preferreds. If the value of their portfolio takes a steep stumble they might crack this rule and when they do they need to redeem shares until they are back in compliance (or alternatively sell a bunch of common shares).
The champion of all coverage ratios today – and for as long as I can remember is closed end fund Tri-Continental Corp (TY). TY has a 5% perpetual preferred outstanding (a $50/share issue with a ticker of TY- or TY-P or TY/P or TY.PR depending on the broker etc) which has been outstanding since 1963. The coverage ratio is OVER 4000%–does that spell safety? It is redeemable at any time at $55/share. Currently it is trading at $47.45 for a current yield of 5.27%. Obviously the low yield means one will forgo a couple percent of yield–BUT you never have to worry about the safety. SAFETY doesn’t mean the share price will always give you a positive total return. The preferred has traded as low are $18/share (or there abouts) back in 1972-1973—wish I would have been around then to ‘back up the truck’.
Why doesn’t TY redeem the shares? The redemption would only cost them $37 or $38 million. That has always been a question–maybe the board of directors own most of the shares? Who knows.
These shares trade rather thinly—around 990 shares per day according to Yahoo Finance. You have to use limit orders as it can move plus and minus $1/share
So if you want pure safety this one is for you. Disclosure–I have owned this one for years (and years)—I don’t sell it I just collect my dividends.
From time to time I update coverage ratios of all CEF preferred and baby bonds which one can see here.
‘Safe’ is in the eye of the beholder to some degree. I need liquidity w any issue. Buying something thats thinly traded becomes a huge risk for me. If I have to sell a few positions I cant be dealing w something that cant execute ‘sell all at market’ w/o paying a pound of flesh
i can’t find this under Additional Links?
very valuable to me and i”de like to be able to find it ; thanks
Ted, are you looking for the specific TY-pfd page? here is that one. Tim had linked in the article the page w all the CEF pfd issues.. Bea https://innovativeincomeinvestor.com/security/tri-continental-corp-2-50-cumulative-preferred-stock/
Thanks, I had never considered these. I know Nuveen used to have tax free variety of this and would guarantee redemption. If anyone knows pls enlighten me whether that went away with the Auction Rate Securities failures.
Funny I loaded up all my pfds and corporates today into interactive lists were I could compare all metrics. Have like 110 positions not counting CDs munis etc What to buy sell hold!!
Then the CEF’s needed evaluation too. Leverage vs non levered was biggest consideration. But I saw some which had been a 12+% discount to NAV were up 20% this year and down to 4% discounts!….Does the expression Sell Mortimer!! mean anything. Rate who that I am its hard to sell 10% CY….
I like TY- . first got in a couple of years ago.
I keep telling myself I will sock drawer it, but I buy the dips and when it gets up more than $5 (two years of divis), I give in to temptation and sell. Mea Culpa.
Watching for another drop…
Tim-
I don’t see SPE-C listed in your table of CEF preferreds. It is one of the safer preferreds, since the underlying SPE portfolio owns a lot of pre-business combination SPACS invested in T-Bills which cover the SPE-C risk. It is also convertible into SPE but still quite a bit out of the money. It also has a maturity date in 2027.
I’ve held TY preferred for several years now and never even bothered to check whether the common stock was available for purchase. I’m looking on Schwab, and it appears they often pay a dividend and then long term capital gains. It appears the dividend is qualified. And I guess the LTCG would just be taxed at my normal tax rate?
I’ve been looking for ideas to purchase in my regular brokerage account. I do not want to cause myself tax filing headaches. I do own a couple K-1’s in that account…..
I guess the bottom line is whether this would be better to hold in an IRA or regular brokerage account.
Thanks for the review on this one. Can someone give the breakdown on tax treatment? Listed as variable.
2022 and 2023 was about 1/2 qualified dividends.
Thanks, I hadn’t noticed your list with coverage ratios before.
Looking through the list (https://innovativeincomeinvestor.com/preferred-stocks-of-closed-end-funds/) HFRO-A seems interesting. Rated A1, 7.2% yield, and 600% coverage ratio. As opposed to a lot of other A1’s with much lower coverage ratios mostly yielding in the mid 5% range.
I haven’t heard of HFRO before. Is there a reason this one is higher risk or is it actually a bargain?
Nathan, Tim’s chart shows the asset coverage hasn’t been updated since 2022
You might want to get current asset coverage.
HFRO-A
It’s a minefield with their real estate portfolio. Take a look at the Q1 2024 presentation.
Nathan, HFRO is a nightmare of a closed end FUNd (yes, I did that purposely) as it trades at a whopping -53+% discount to their alleged NAV and cut their distribution in half at the beginning of this year. The fund is truly troubl, have very poor management and I’d encourage you to do a deep dive into their asset base as the risk/reward just isn’t here for a quality investment https://www.cefconnect.com/fund/HFRO
In Russian we say Даю́т — бери́, а бьют – беги́
Have a great weekend, Azure
Azure:
Nathan was asking about the preferred HFRO-A, which I believe is still rated A1 by Moody’s. Currently yielding 7.25% with 600% asset coverage.
How much do you really know about HFRO? The dividend cut saved $31M per year and as you must know provides more coverage for the preferred. HFRO also sold out of their QuarterNorth Energy position in March at a $24M realized gain (yes, this fund also had an energy position). Its current 75% real estate exposure has zero percent allocated to office.
So with real estate gaining steam with the Fed entering an interest rate cutting cycle, perhaps things will be turning around for HFRO. I have been buying the preferred HFRO-A and believe it eventually trades at $20+.
But I still won’t touch the CEF common. DYODD.
Papa, I am visiting my home in Italy and will be kind and not rip into you and just give you and anyone else some real facts with no agenda. This is because we all play in the same “sandbox” here and hopeful I can save someone here some painful losses in their portfolio($). Closed end fund HFRO in one of the greatest bull markets of all time continues to do horribly with a 52 week return of NEGATIVE -27.11% (according to Yahoo Finance and their statistics page (pull it up for yourself) https://finance.yahoo.com/quote/HFRO/key-statistics/ Also, if you would kindly pull up https://www.cefconnect.com/fund/HFRO click “all” on the left side and scroll down: the credit “quality” of this horrid fund is: NON RATED 82.13%, 12.47% B rated and their high water mark of credit with 3.35% BB rated. Now let’s talk about the average rate of return: 1 year NEGATIVE -19.87%, 3 year average NEGATIVE -7.34% and 5 year average NEGATIVE -6.33%; the only one making any money are the people that run this fund (that are not doing a good job). The underlying asset that is supporting your preferred A is toxic and has grossly underperformed any matrix you can come up with. Please tell me what you are looking at that would make you or anyone else that wasn’t insane buy this fund or lend them money on their preferred. If I ran this closed end fund (yes, I ran billions of dollars of institutional money for over 2 decades on Wall Street), I’d have been fired long ago and would just use my law school degree to make a living instead of managing someone else’s money. Do you think those that run this fund would put their own money or their parents money in this dog with fleas?? What an enormous flaming POS that Highland should be ashamed of themselves to take ANY management fees or expenses until the fund at the very least isn’t losing money every year. Rant over and now back to looking over my vineyard 🍷 …
I have no dog in this hunt and don’t plan to either, but I did confirm that Moody’s rates the preferred A1…. Confirmed in Dec 2023….. I wonder why? it sure doesn’t jibe with HFRO or its preferred’s performances. Even the preferreds charts seem to confirm the horrible performance although I suppose you have to be sure to find a chart that reflects divvies too to be completely accurate….
https://www.moodys.com/credit-ratings/Highland-Opportunities-and-Income-Fund-credit-rating-830911753?emsk=32&isMaturityNotDebt=0&isWithDrawnIncluded=true&emvalue=CUS%3A43010E503&debtIdText=CUS%3A43010E503&mdyDebtId=830960450&keyword=43010E503 but you need to login
Thanks to all for their input here. I think a fair statement might be “HFRO-A has a high yield relative to its on-paper rating because HFRO’s management has a justifiably poor reputation”. I’ll probably steer clear.
AB, case like this always reminds me to take bonds and stock ratings with a grain of salt especially after the GFC.
The Miss’s and myself are going to one of the many Wilson Family wineries this evening for a picnic on the lawn and to enjoy some live music along with a glass of Zin.
Prost
Charles, thank you for your post. Do you mind me asking which of the Wilson winery vineyards you were at? Sadly, I can’t have any wine shipped to my primary home in Ft Lauderdale as the wine gets destroyed by the heat. I use to try to have wine shipped from one of my favorite areas in Washington State in dry ice 🧊, but it’s just too much of a risk, so I have to just wait until it gets much cooler in South Florida. The vast majority of wine in Italy is truly outstanding as there are just so many excellent vineyards that I’ve visited and am humbled by their quality. Cheers, Azure
https://www.mazzocco.com/Winery-Calendar
Us Plebes get in free if you reserve ahead of time and if you don’t mind sitting on the grass. Bring your camp chairs and table. Had a 2021 Briar Zin for $20.00 good medium body, right at the tipping point of being over the top. Should age well allowing the ripe fruit to mellow out along with the tannins and acid. Good music and friendly company. Bring your own picnic or enjoy a burger, pizza, or paella from the rotating food vendors.
Charles, thank you for the link. If you have time and would like to tour a magnificent winery, I’d highly recommend Jonata in the Santa Rita Hills in California to you (you have to make an appointment for tastings) https://californiawineryadvisor.com/winery/jonata-winery/
Jonata is next door to Screaming Eagle 🦅 . I’ve been getting grape juice 🍷 from these 2 wineries for many years and the way I got Screaming Eagle to offer me wine each year is an interesting story. I use to own the largest Mezcal producer in Mexico (like an high end tequila) and traded my way (and a bit of good timing) to having Screaming offer me wine each vintage year. Sadly, Screaming Eagle doesn’t offer tours, but next door at Jonata does and if you are able to go, it’s a must see and must drink tour. Be well and cheers ваше здоровье, A
Thanks for the suggestions Ab, one of these days I have to go south and do some wine tasting. Been as far North as Victoria for wine trips and southern Germany. Last trip was to Austria and Hungry but was too short a time to visit any wineries.
I have owned TY- for many years now – like Tim, no intention to sell.
Will buy more if it does ever go back down to the $42-$44 range.
Have to wait until interest rates go higher again. It’s interest rate sensitive but at the article states it’s a fortress with multiple layers of shielding against credit risk.
In this cycle it did hit your buy range.
I guess we are hoping for a flash crash in this, sort of like what BOXX did a few weeks ago. Certainly no reason not to have a GTC in.
Wasn’t BOXX’s drop just a reflection of its distribution?
TIM-
The TY preferred symbol is TY- like an open-ended CD.
TY itself has been going since 1929- same as Adams ADX 10/1/29 and Adams PEO 1/30/29 — what a time to IPO !
Gary–I will clarify–the TY I used was for the common shares. The preferred is numerous different tickers depending on the system.
Tim
TY common is about $32– I think you meant the preferred as TY- or whatever symbol, no?
Sorry- you were referring to TY’s preferred and did not try to give its symbol because of the variations.
Tim –
Below is what you wrote about TY-P back in November 2023 (11/28/23).
What a difference 9 months makes. Glad I was an aggressive buyer back then. Have actually taken some profits on trading days where it has spiked up aggressively. It is an odd bird trading-wise. But very little value now at a yield approaching 5%, no matter the safety. Much better CEF preferreds with 50 – 60 basis points higher yields also offering tremendous safety including GGN-B, GDV-H, and even GAM-B at $25.50 (I own all three).
11/28/23
My Worst Performing Holding
It seems weird that the holding which has performed the worst for me over the last year is the one I am most comfortable holding forever–well not forever, but for the time being as long as interest rates remain ‘tame’.
Tri-Continental Corporation (TY), a closed end fund (CEF) has a $50/share preferred which was issued in 1963–the coupon is 5% (or officially it is a $2.50 preferred), but at the current price of $43 the current yield is 5.81%. Not what you call a high yield in these times of HIGH YIELDS, but in my mind the most solid preferred available. The issue is not rated, but when you have a 4000% coverage ratio who needs a rating (all closed end funds must maintain at least 200% coverage on their ‘senior securities’).
TY has net assets of $1.6 billion and over the last 10 years the common shares have returned 10.6% annually. Here is their fact sheet. Just a simple stock and bonds CEF–nothing fancy.
This issue is redeemable at anytime at a call price of $55/share so I don’t have to worry about it being redeemed–just keep drawing the dividend. My share price is down 8% from my average buy price, but I have held it for a long time so I have a positive total return.
The issue is here.
The ticker on Fido it is TYPR on eTrade it is TY.PR – some others have it as TY- or TY-P. If you can’t find it try spelling it out in your symbol box (Tri-Continental Corp).
This is pure ‘sock drawer’ material–at this price 5.81% is not a bad return for the level of safety. One must be patient if buying as the average daily volume of the preferred is very minimal-922 shares per day according to Yahoo.
If you are highly sensitive to share price movements you don’t want to hold this or any low coupon issue when interest rates are racing higher. On the other hand the level of safety certainly provides for a good nights rest.
yeah – it is TY-PR on etrade
good points! long GAM-B which has solid over 700% coverage as well, would add near or under $25 my basis is 24.56 in that and only have a small amount should have more!!
Bea,
Although there is no doubt that TY- has the most coverage, I prefer GAM-B for a little higher yield, which is also back by an almost 100 year old CEF, GAM. Moreover, they have a policy of buying back GAM-B when it is below par, so you can be reasonably assured of share price safety. Buy those rare, transitory dips on this one.