December’s “Income Security of the Month”

By Travis Johnson, Stock Gumshoe, December 10, 2008

A big part of the advertising that comes out for Carla Pasternak’s High-Yield Investing is by way of their writeups on the “income security of the month” — and, as she has done this month, she often recycles these ideas … it looks like today’s “Income Security of the Month” was also the income security of the Month for October.

Times are tough, everyone’s cutting back — so no need to hire another copywriter if you’ve got a perfectly good sales letter sitting around!

Some of the comments below first appeared in this space back then, which now seems a lifetime ago, but I’ve added some more info and done some updating.

“These special hybrid securities not only provide strong returns during market turmoil thanks to the ‘AAA’-rated portfolio of their parent company — they also provide unlimited upside potential since the shares are convertible at any time into stock of the underlying company.”

So we’re told that she has for us a “Hybrid Security [that] Provides Stable, Legally-Bound Monthly Payments and a 10.3% Yield.”

In this case, what she means by “hybrid” is a convertible preferred stock — a hybrid security that sometimes is considered debt and sometimes equity, which has set preferred dividend payments and a stronger position than common equity (meaning that their dividends have to be paid first, and that they’re ahead of stockholders in the line for consideration in bankruptcy court, though they’re behind the bondholders). Usually preferred stock is held for income, though the convertible nature generally means that you also get some potential upside if the equity takes off.

So, assuming that you’re interested in a 10% yield and some level of safety (in her words, at least), what is the actual preferred stock Carla is hyping this month?

We get some clues:

It pays those dividends monthly (this is very unusual for preferred stock, almost all pay quarterly or semiannually).

It has beaten the S&P 500 by 44.2% over the past year. That’s certainly better than I’ve done. (It has also handily beaten the market over the last couple months, since she last teased us about this same investment — it’s up about 6%).

The preferred shares are listed on the NYSE.

And this:

“The parent company of our “Income Security of the Month” invests exclusively in the most secure investments on the planet — 99% of its portfolio is in securities with credit ratings of “AAA.” Thanks in large part to this strategy, the preferred shares have outperformed 97% of the stocks in the S&P 500 during the past twelve months.”

(back in October, this had outperformed 90% of the market … that other 7% were apparently the final holdouts that collapsed late this year)

So … for some of that there are a few different companies that could fit the bill, but given that they pay monthly and have a 99% AAA portfolio this must still be …

Capstead Mortgage Preferred Series B (CMO-B)

Capstead continues to match the clues — NYSE traded convertible preferred, yield of about 10%, holds 99% AAA securities … but it’s feasible that there are other convertibles for mortgage REITs that are comparable that I didn’t find. The shares have had a nice run recently with the rest of the market, so the yield is now down to 9.7%, but still certainly quite nice.

Here’s the description of this issue from QuantumOnline (which I always recommend for those in search of income securities):

“Capstead Mortgage Corp., $1.26 Cumulative Convertible Preferred Stock, Series B, liquidation preference $11.38 per share, redeemable at the issuer’s option on or after 12/17/1997 at $12.50 per share plus accrued and unpaid dividends, with no stated maturity, and with distributions of $1.26 per annum paid monthly on the last day of each month. The Series B preferred shares are convertible any time at the holder’s option into 0.5935 shares of common stock.”

These preferred shares traded at $12.20 when I wrote about then in October, and are now up over that redemption price at about $12.75. They’ve also updated the conversion ratio — you can now convert your preferred shares to common shares at a rate of 0.6047, though that’s still far from profitable. Conversion seems very unlikely to make sense unless the common stock spikes up by 100%, and in that case the company could still redeem your preferred sh