Lethargic Global Economy Benefits Income Investors
By: Tim McPartland,
As we continue to get soft economic data out of virtually all areas of the world income investors have been feasting on outsized gains in their investment portfolios. Securities with any type of dividend attached to them have continued to rise in value in spite of many of them being of poor quality. There doesn’t seem to be any limit to the number of new preferred shares that income investors are willing to gobble up, driving prices higher right from the 1st available day of trading. One of our quick methods for watching preferred stock pricing is to see how many $25/share issues are trading below $25–historically there have been 170-200 issues below $25 (of the 400 issues we follow). At this moment there are just 104 issues below $25–this market seems a bit overheated.
I think it was 4 or 5 years ago when all the “smart people” told us it was just a matter of time before interest rates began to rise and income investors would be wiped out. We are still waiting, but we are vigilant. We do think that there will be a negative event, or panic, which will be very painful for income investors, but we have no idea when that may occur, what may set if off or how devastating it might be. You can not sit around with 100% cash and wait for a disaster that is coming “someday” and because of this we plow ahead.
In the last 6 weeks our income portfolios have performed in a stellar fashion with the Blended Income Portfolio garnering a gain of about 2.7% and the more conservative Short/Medium Duration Portfolio gaining 1.7% over the same time frame. While preferred stocks and exchange traded debt issues have been responsible for about ½ of our gains the balance has come from strong moves in some of our common stocks such as Johnson and Johnson (NYSE:JNJ) adding to the nice gains with share price appreciation of 5-6%. Additionally, the lone energy issue we own, NGL Energy Partners (NYSE:NGL), spiked by over 60% as energy prices recovered. We are certain that more aggressive investors who speculated on energy issues as well as very low quality preferred stocks outperformed our gains, but we are not speculators and seldom expose ourselves to unnecessary risk.
During the month of April we “harvested” some profits from issues that had been purchased during the January income investor panic. We had previously written about the harvesting which we had undertaken. We did have a change of heart on 1 issue, which was the Ashford Hospitality Trust series D preferred (NYSE:AHT-D) which we decided to keep a bit longer. We had sold the series E preferred for a nice capital gain, but the company announced “acceptable” earnings prior to us selling the series D thus it looks like we will hold the shares for another quarter. As we had mentioned before AHT is a highly leveraged lodging REIT with $3.9 billion in debt against $5 billion in assets. This high debt level works when revenues hold up and interest rates are very low, but if either factor was to move significantly it could send the company into a tailspin.
Since our harvesting of profits we have not made new purchases and our cash position is near 15%. We do hold shares of Dupont Fabros Technology preferred (NYSE:DFT-A) which has been called for redemption which will add another 2% to our cash position which will be available for purchasing “bargains” when the opportunity arises. We are patient and are watching for those “bargains”.
For the more nimble investors out there IPOs in preferred stocks have presented outstanding opportunities for some quick capital gains. While some of the new issues move up very quickly from $25/share, others move in a slower fashion. For instance the KKR & Co 6.75% preferred (NYSE:KKR-A) traded for a full 8 days before reaching $25, but in the next month sprinted ahead by $1/share. It is not our nature to try to quickly “flip” preferreds for a quick profit, but for those with the time and patience (waiting for Grey market executions) quick 1, 2 and 3% profits are available.