Income Security of the Month

By Travis Johnson, Stock Gumshoe, September 25, 2009

Every once in a while I take a look at StreetAuthority’s “Income Security of the Month” — I know a lot of my readers are income and dividend-focused, and I have a certain fondness for getting my returns in cash on a nice, regular basis, too.

So on this rainy Friday on the nation’s capital, let’s take a gander at this income stock — apparently it’s from a “Bank So Healthy that It Said ‘No Thanks’ to Uncle Sam’s Money.”

This is a Trust Preferred, according to Carla Pasternak, and it yields 10.1% through twice-yearly dividends. So what is it?

“This out-of-the-mainstream income tool is a hybrid security that gives you the best of both worlds: the steady income of a bond and the appreciation of a stock.

“Like bonds, preferred stocks pay you steady interest. And like common stocks, they can also hand you nice capital gains as the company grows.

“But when you buy a preferred stock, you have one huge advantage over common shareholders…

“When a company runs into tough times and cuts or cancels the dividend, it’s tough luck for common stockholders. But if a preferred stock ever suspends payment (extremely rare!), your payments accumulate on the ledgers and are paid in full when the company recovers.”

OK, so that explains this type of security reasonably well… though that “hand you nice capital gains” stuff is probably a bit too optimistic unless you’re just counting on people bidding it up if they’ll accept lower interest rates in the future — Trust Preferreds are really bonds at heart, they trade on their dividend yield, they do not participate in the capital gains of the stock in any direct way like convertible preferred stocks or bonds do.

How about this specific one that we’re looking for today?

Clues, please!

“This stable preferred stock has a perfect 12-year track record….

“This “trust preferred” security is guaranteed by one of the nation’s oldest and largest banks. And your payments are taxed as ordinary income, which makes it perfect for tax-deferred accounts.

“The issuer is one of just nine banks to pass the Federal Reserve’s stress test ….

“This bank is in such good shape that it recently said “No Thanks” to Uncle Sam’s money. It up and quit the government’s Troubled Asset Relief Program (TARP). That says more about its financial strength than any press release or analyst’s ...

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