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    Taking Money Off The Table? Minibonds Can Provide Big Yields

    One of my favorite non-stock investments that will pay you ample yields with less risk are “minibonds.”

    To this point, it’s been a pretty good year to be an investor. With the S&P 500 recovering and delivering a return of more than 15.3 percent — many folks are feeling a bit flush, and for good reason.

    After all, it’s been more than just lackluster or negative returns over the past 10-plus years that have left a bad taste for risk in the mouth of the average investor. And just because stocks have been doing well in the first five months of the year, there is no guarantee the trend will continue or the gains made to date won’t be lost.

    This brings up the old adage — formed with little backing — of “Sell In May And Go Away.”

    I’m sure that you’ve heard and read of this adage over the past few weeks. Even if there’s little hard mathematical science — other than the summer doldrums setting in — behind it, with the recent minor pull-backs in the S&P 500, you may be thinking of taking some winnings off of the table.

    Crack In The Bull Market?

    May did see stocks rise another 1.25 percent overall. But if you look at the market’s trading from the peak in the S&P 500 on May 22, there’s been a bit of a minor sell-off since.

    THE S&P 500 INDEX FOR MAY, 2013

    S&P 500 Index - May 2013

    Going from 1687.18 at the recent top to the current levels around 1630 means that investors have already given back some 3.3 percent, as tracked by the S&P 500 index. That’s meaningful, especially at an annualized rate of a negative 41 plus percent.

    So, maybe there is some reason to take some gains and put a bit of the cash proceeds into something that’s out of the stock market and will pay you a bit to be patient for better bargains later this year.

    Park Profits

    If you do want to sell some of your stock gains but still want to earn bit over the coming months and quarters, I have some ideas for you.

    One of my favorites that I’ve written about recently is an investment that offers bigger yields and trades with very little volatility and continues to be missed by professional investors and traders. I call these securities minibonds, and they are perhaps a great non-stock investment that will pay you ample yields with less risk.

    Minibonds are high-yielding, high paying bonds that trade like stocks but really are just bonds that you can buy with ease right on the New York Stock Exchange (NYSE). They look just like stocks and are bought and sold much like stocks. But they are actually bonds — not that most folks, including your broker, really ever notice.

    Bonds are supposed to be for the big guys: the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that continues to bring bonds within the reach of individual investors.

    These minibonds look and trade just like regular stocks. And rather than being priced and traded like traditional bonds — with $1,000 face values traded in lots of tens of thousands or millions — these trade in more manageable quantities with face values of $25 or less.

    Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have rather odd acronyms given by the banks that put them together and brought them to the market. But, behind some of the odd titles are some very investor-friendly securities.

    Minibonds 101

    What exactly are minibonds?

    While they all tend to behave the same they can have different titles on them. Following is a rundown on some of the more popular minibond types.

    I’ll start with an example of the types called Trust Preferred Securities (TruPS). These have been traded quietly for quite a while and dhaven’t been on most investors’ radar because they’re just not widely touted by anyone.

    Behaving much more like preferred stocks, these securities arise from regular everyday companies, including big utilities and many other industries, which essentially issue them to bank holding companies. The holding companies then package them up as trusts and issue them to investors in the markets just like stocks.

    The bank holding companies then use the funds to invest in bonds from the issuing companies. Those bonds typically have intermediate to longer maturities, and the cash flow from the bonds is what pays dividends on the TruPS.

    The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the Securities and Exchange Commission. The IRS lets the company treat the dividends as debt, allowing it to reduce its tax liabilities just like regular bonds. The investor benefits from the steady dividends and the advantages and security of owning a bond, and the company gets access to cheaper after-tax capital.

    There are a plethora of these issues as well as other varieties of these easy-to-buy bonds that can be called by other acronyms including PINEs (Public Income Notes), QUIBs (Quarterly Interest Bonds), just to name two.

    But what makes them all similar is that they’re issued in sums typically amounting to $25 with calls by the issuing company at their issuance price — again typically at $25. The keys then are to understand the credit of the issuer, know the current price of the TruPS, and then to know the yield to the call price as well as the call dates.

    And even better, even though these trade like stocks they tend to be very steady in price — even when the stock market is in a tizzy of trouble — mostly because nobody in trading rooms or hedge funds knows about them.

    One more thing to note: Because they are brought to the stock market by banks, some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don’t get spooked,  just look behind some of the names on the stock tables to find the real issuer.

    Mini-Bond Bargains

    For your stock market proceeds, I have three minibonds in which you can park your stock market gains that can be bought right now with ease and will pay you 6 percent, 7 percent and more.

    I’ll start with a minibond from one of the globe’s bigger insurance companies, Aon, based in London. The insurance company is an under-leveraged and conservative firm with little overall debt compared to its asset base. The ratio runs at a mere 13 percent, a fraction compared to many of its peers around the globe.

    This and a steady revenue flow that’s been increasing in its core markets over the past three years at an average rate of more than 24 percent means that it should well continue to cover its interest payments and be very credible to pay the principal of its minibonds.

    This minibond trades under the symbol of KTN and has a coupon interest rate of 8.205 percent. It’s trading around 31.20 for a current yield of around 6.6 percent.

    Next is a minibond from a U.S. power utility company, Exelon Corporation. Based in Chicago, the company generates and distributes electric power in Illinois and Pennsylvania and operates a natural gas utility in the Southeastern urban area of Pennsylvania.

    The company has a bit more debt to assets compared to Aon but is still well-covered with a debt-to-assets running at only around 47 percent of its overall capital.

    Revenues are strong and rising with the past three years seeing gains of more than 15 percent on average. This and the strong base of industrial and residential customers should continue to provide a strong backing for its minibonds’ interest and principal payments.

    The minibond trades under the symbol KTH and has an 8 percent interest coupon and is trading around 31.90. This gives the minibond a current yield of about 6.3 percent.

    The third minibond is from a mortgage investment company called MFA Financial. The company is part of a successful collection of public and private investment companies and fund managers that have been cashing in on the higher yields offered by the improving mortgage market that’s also being supported by the Fed via its continued stimulus efforts.

    From the big private equity guys such as Carlyle Group and Blackstone to public companies such as MFA Financial, there has been a lot of money being made for a while now.

    MFA Financial is an investor in mortgages and mortgage securities that not only has overall market support from the Fed, but also has additional and specific government guarantees on the mortgage investments that it makes and owns. That means double the protection for you.

    MFA Financial has an 8 percent minibond under the symbol MFO. They’re trading right now at around $26 s, which gives you a current yield of 7.7 percent.

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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