Earn 7.4% Income for Life
November 9, 2017
Little-Known Income Stream Yields 7%
Before we get into this piece, I have to tell you: this might be one of the most boring niches in the market.
You probably won’t be bragging about this investment around the office water cooler. Most of my colleges snooze whenever I bring it up at our weekly editorial meetings
But while they have the excitement of paying taxes, it also returns a higher yields than nearly any other safe investment around today. And unlike bonds, these issues have no set maturity date. So unless the business shuts its doors–a pretty unlikely scenario–investors will likely lock in their income stream for life.
The investment is actually a “preferred stock” that trades on the New York Stock Exchange. It was issued by Annaly Capital Management, Inc. (NYSE:NLY). So your main concern is the creditworthiness of the company, Annaly Capital, which buys government guaranteed mortgages.
What I love about these preferreds, to put it bluntly, is that if Annaly goes bust, you’d get paid all of your investment back, as well as any outstanding interest before shareholders–including the CEO–see one red cent.
And that is the big advantage of “preferred” shares over regular common stock. If a business goes under, then bondholders get their money first, preferred shareholders get their money second, and common shareholders get their money last.
Moreover, preferreds pay a fixed dividend, like a bond. Because your return is known well in advance, preferred stocks tend to be much less volatile than common shares. And these payments tend to keep rolling in forever, or at least until the issuer goes out of business or buys back the issue.
And with interest rates so low right now, the yield on some preferred shares looks attractive. Annaly Capital Management Inc. Series D Preferred (NYSE:NLY.PD) shares, for example, will yield 7.4%, as long as you don’t pay more than $25.40. But to get a good yield, you have to be careful about the price you pay, as your cost basis can change you returns dramatically:
| Price | Yield |
| $24.00 | 7.8% |
| $24.50 | 7.7% |
| $25.00 | 7.5% |
| $25.50 | 7.4% |
| $26.00 | 7.2% |
| $26.50 | 7.1% |
| $27.00 | 6.9% |
| $27.50 | 6.8% |
As you can see, paying too much for these preferreds can eat into your profits.
If you’re interested in these preferred issues, do a deep dive on Annaly. Also, be sure to use a limit order. These issues usually have very thin trading, so even a small order could send prices soaring.
In a world where everyone is looking for excitement, boring preferred stocks may be a great place to turn.
