Portfolio Maintenance for Income Investors

Sometimes income investors who purchase and hold preferred stocks and baby bonds (bonds priced at less than $1,000/share) tend to neglect the most basic of investing portfolio maintenance.

We know this is the case because I have to force myself to perform this maintenance — it’s not my favorite thing to do. While these particular securities move in a narrow price range most of the time, it doesn’t mean that we can “buy and hold” without paying attention to the micro and macro factors affecting the long-term health of our holdings.

The most basic of maintenance items that income investors need to perform is simply to review the financial health of the company issuing the preferred stock or baby bond that they hold. Just because the share price of a preferred issue is fairly stable doesn’t mean “all is well.”

This is particularly true for the high-yield sector. For instance, TeeKay LNG Partners (NASDAQ:TGP) has two preferred issues outstanding with coupons of 8.50% and 9%. An investor searching for yield may purchase these without considering the long-term fundamental prospects for this LNG shipping company. As the high coupons would indicate, this is a high-risk holding and one wanting to hold these issues must know the current situation of company financials.

The income investor must, at a minimum, review the quarterly earnings statement of the company. Optimally, the investor would read the quarterly earnings releases from peer companies, such as Dynagas LNG Partners (NYSE:DLNG) and GasLog LNG Partners (NASDAQ:GLOP), to observe whether there are industry trends in revenues and earnings.

The next important piece of portfolio maintenance that the income investor needs to perform relates to the balance of holdings in one’s account. This is important, in particular, for those who have many different brokerage accounts. Once again, we know this can be a problem because of our own personal experiences. Personally, I have four different brokerage accounts due to job changes over the years. While one could consolidate accounts, I always like the idea of diversification which includes brokerage firms.

Late last year, we reviewed all of our holdings in the four accounts noted above and found that we were holding more than double our normal position size in a particular high-yield security.  This kind of scared me, since I typically don’t hold many high-yield investments at all and I certainly didn’t want to hold double my normal positioning. Needless to say, I sold the excess holdings over the course of the next week.

An investor who has many accounts could simply create a spreadsheet with all holdings consolidated. The problem I have is I have so much happening in my life that it is just one more thing to keep updated. By the time evenings roll around, I am worn out and don’t keep the spreadsheet updated.

Lastly, investors need to review their portfolios for securities that may be priced at a level that makes “harvesting” profits a reasonable reaction to the situation. Preferred stocks and baby bonds trade very thinly, most trading only 5,000 or 10,000 shares per day. This thin trading creates situations where investors push the price of a $25 preferred stock up to $26, $27 or $28 with seemingly no fundamental basis to the pricing. When this happens, it is likely that the price will drift lower over the course of a few weeks, thus creating a situation where selling is preferable to holding. If the share price drifts back toward $25, one can always buy shares back at this lower price.

While the above very basic items are not all inclusive of portfolio maintenance that must be done by income investors, they are minimum items that one must do on a regular basis.