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.
I’m targeting living another 12 months. It’s worked out well the last 64 times.
LOL love it LT
Don’t you love being right?
and if we’re lucky, we won’t know when we’re wrong, 2wr
Hi Tim,
I wonder if your expectations are reasonable. While short term rates are predicted to drop a lot over the next year and half, long term rates aren’t currently expected to go down by much, and they are expected to reach their bottom in about 6 months. The 10 year rate is actually predicted to be a smidgen higher in a year than it is today.
Here’s a link to the current “forward curves” that show expected rates based on current futures prices: https://derivativelogic.com/forward-curves.
It might help to deselect some things to get oriented, but the basic story it tells is that the 5, 7, and 10 year are expected to drop by a very small amount and then start going up in 6 months, ending considerably higher than today’s rates. By contrast the short term rates are expected to drop lot over the next 1.5 years before they start to climb, but still stay much lower than today.
This isn’t to say that your theory is wrong, and obviously predictions aren’t guaranteed, but it might not be the easy win you are hoping for. In fact, I just bought some LANDP (unrated but otherwise I think roughly comparable to BHFAN) under the same theory. But rather than putting it in a sock drawer, I may be looking to sell within the year unless the predictions change due to deteriorating international conditions.
(I am far from expert on this. If anyone thinks I’m reading the forward curves wrong, please tell me!)
Bought some HOVNP at $17.70 (Div Yield 10.80%)
Just remember that it is non-cumulative and they stiffed investors for close to 15 years before re-starting the dividends.
https://www.sec.gov/Archives/edgar/data/357294/000104746905018621/a2159949z424b2.htm
Large position in HOVNP (was xd) the div cut (non cum divs) was for violation of credit protection w lenders as they were loaded w debt which has been cleared including two credit rating agency upgrades and of course now they are more than compliant. I see $22 on this at some point where it will be more in line w h/y rates and mgmt ‘learned ‘their lesson on being debt heavy to grow. Mtge rates down mean will help and they built a huge buildable land bank in their communities which has massive value today. But watch like a hawk of course like any h/y OR any investment DYODD Bea
Bea… fwiw interesting data point HOV has some tradable senior debt to include 430m 11.75 due 9.30.29, call 3.30.26 @ 105.9 dtp 9.30.28. Yesterday print 110.95.
To your point, appears they have been buying back their 5’s of 2.1.40 as deal size of 90m now down to 25m outstanding. (442488ch3)
The markets today were like a roller coaster. Opened way down then recovered then down again and up, finally finishing the day down. Accounts were all in the green and about 1/4% up for the day. 30 holdings were off from 1 penny to over a $1.00 for CNLPL
Lots of dividends and interest hit the accounts today. Been buying a few things the last couple days and have buyers remorse on one. What can I say, it was the newest buys and of course it had to be one of the ones that was down.
I already own BHFAL & M and I thought at the time that they were one of the more mediocre of the insurance preferred but I was looking for 7% on my purchase.
PFE is now paying 5.8% and the stock is down. It sold more shares of the UK generic drug maker it spun off amid speculation it was doing this to pay for dividends.
In other insurance news today ESGR did a loan loss Portfolio transfer to SPNT
Not sure who got the better end of the stick on that one. Even though stock holders agreed to the buyout offer from Sixth Street it still has to close.
Tim, for all of us that say we do NOT “market time”, me included, that is precisely what your premise is . You, me and many others are forecasting lower interest rates and investing with that belief. Just to state the obvious, there is some percent chance we are all wrong and interest rates, particularly long term rates do NOT fall accordingly. And if that is the case, the capital gains might turn out to be zero. I think a reasonable exercise for all of us to consider is how our portfolios would behave in a range of interest rates. Stated differently we might not want to over allocate to issues that depend on falling interest rates to perform well.
Tex, I took Powell’s remarks last week to mean they will be taking a wait and see attitude on the economy and no clear indication of more short term rate cuts in the rest of the year. All it takes is the escalation of the Mid East war to panic the market, especially if one of Uncle Sam’s boats gets hit and damaged or sunk.
I am up a little over 9% in MRGB having purchased at $18.60/share. I recently bought into MGRD and I am a little underwater in that one. I may add to MGRD soon.
Nice – I have consistently picked up MGR over the past more-than-a-year and now have a large position at 22.85 avg. with lowest purchase in the 21.30s. Hope they do not call it!
It will be very interesting to see if MGR is called. It was issued 3/21/2019 when interest rates were very low. So, I am assuming that there are several other significant variables that will determine if and when MGR is called. It is part of my long term investment plan, and I hope that it will be around for years to come.
LarryL–I feel totally comfortable holding it – thus the sock drawer designation, but the return going forward will be somewhat meager as you would expect for a high quality issue.
Long MGR as well and the MGRE too..will hold. Brighthouse of course is where MET spun out all their ‘things’
What’s the deal with BHF buying back all those shares and earnings all over the place? I can’t make heads or tails what they’re trying to accomplish.
Brighthouse was the dumpster spinoff of MetLife of course and ..they are doing quite well!! earnings are lumpy to comply w how you report ‘earnings’ for life companies. They seem to have managed the ‘less’ attractive things MET did not want to a viable investable company. Einhorn’s Greenlight Capital is a big holder and believer. No positions. Bea
Bea I actually have an inherited MET life policy that I converted to my name. The return is terrible which probably explains why they are doing well, they took a chapter from Schwab’s playbook on holding other peoples money and paying low returns. I have liquidated about 1/2 so far and moved it out to a regular trading account. Guess what I bought with it? Yup BHFAL and BHFAM