I am retired and take educated guesses on all things financial.

December 13, 2009

December 13, 2009: Fifteen Dividend Ideas For The Gift That Keeps On Giving

Dividends are important to many investors. They are important to me, more so than years ago when I was happy with only growth. Instead of being satisfied with dividend yields of companies that are raised by a pittance and lowly corporate and government bond rates, I believe that investors serious about seeking higher yields need to be a bit more creative using securities that are not generally on the radar of retail investors to achieve meaningful dividends and interest.

Some ETFs provide higher yields with safety. Certainly, preferred stock ETFs such as PowerShares Financial Preferred Stock (PGF), PowerShares Preferred Stock (PGX) and iShares' U.S. Preferred Stock Index (PFF) are worthy for consideration within an income-oriented portfolio.

One asset class that is seldom discussed is a preferred security called a trust preferred, which is a listed entity brought to market by major companies. The trust preferred is a hybrid security consisting of a preferred stock issued by a trust and a debt security issued by the company. The trust is a subsidiary of the company set up solely for the purpose of selling and administering the preferred trust.

Companies issue this debt because the interest (dividend) paid on a preferred trust share is deductible from corporate income taxes, whereas normal dividends are not. Trust preferreds are subject to redemption at the company's option, so buying a solid company trust preferred at a discount from the redemption price is wise. It creates the ability to gain from the appreciation of the security as well as the quarterly payout.

The history of payment on trust preferred securities as far as I know has been excellent, so long as the company does not crash. The roster of trust preferred securities is long, and the vagaries of the market appear to have mispriced a number of them. If receiving 6.5-9% on a security is of interest, take note of the following examples to initiate your search. I have included the cusip numbers since these liquid securities may be hard to find with online brokerage searches. Quantumonline has all you need to know regarding these and many other trust preferred securities:

BAC Capital Trust I, 7.00 (cusip 055187207) $21.91
BAC Capital Trust II, 7.00% (cusip 055188205) $21.80
Deutsche Bank Capital Trust V, 8.05% (cusip 25150L108) $24.90
Fifth Third Bank Capital Trust VII, 8.875% (cusip 316780204) $24.37
HECO Capital Trust III, 6.50% (cusip 404156200) $24.20
J P Morgan Capital Trust XI, 5.875% (cusip 46626V207) $21.57
J P Morgan Capital Trust XII, 6.25% (cusip 46626X203) $23.80
KeyCorp Capital Trust X, 8.00% (cusip 49327R103) $22.00
MBNA Capital D TRUPS, 8.125% (cusip 55266J200), $24.17
Merrill Lynch Capital Trust III, 7.375% (cusip 59025D207), $21.66

All of the above have a $25.00 call.

Master Limited Partnerships are tax advantaged vehicles that provide a steady income stream that is usually enhanced each fiscal year. Although there is a downside element to these securities due stock price fluctuation, I believe the following five are solid enough to warrant examination for income with modest price appreciation.

Teekay Offshore Partners (TOO) $17.60/share, 10.35% yield
Enbridge Energy Partners (EEP) $50.65/share, 8.5% yield
Regency Energy Partners (RGNC) $19.10/share, 10.3% yield
Energy Transfer Partners (ETP) $43.87/share, 8.16% yield
Suburban Propane Partners (SPH)$45.45/share, 7.40% yield

Investing for income is noble. To reap high dividends and/or interest by investing in carefully researched securities via preferred trusts and MLP's is divine.

The author holds positions in three of the mentioned securities.

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