Tuesday, February 12, 2013

DOW Breaks 14,000

For the first time since 2007 the DOW has surpassed 14,000.  Stocks have been on fire!  It's safe to say the market is fully valued (or close to it) which makes my job more difficult as a value investor.  As always, there are still companies trading at attractive valuations.  GD and TD come to mind.  But I have to ask myself if buying equities at these levels is the best decision. 

The stock run up is great... but it has also tilted my allocations past the 90:10 stocks:fixed income that I aim for.  There are many vehicles available to investors beyond common stocks.  Many flavors of fixed income offer conservative investors higher current yields than dividend growth stocks tend to offer.  A 3% yield growing at 7% per year is fantastic, but it's going to take 10 years for the YOC to reach 6%.  Here are a couple fixed income securities I'm considering for my next purchase that come standard with yields in the 5-6% range:

ARU: Ares Capital 5.875% Senior Notes
This is an exchanged traded debt that will mature in 2022 and is callable starting October 2015.  Now I realize that bonds are seen as being scary right now.  I agree.  My strategy is to keep the duration to the short or intermediate term.  Locking in for 20+ years is crazy in this environment.  The FED has already proclaimed that interest rates are going to be low the next couple years.  Beyond that we don't know.  What I do know is that this bond matures in a little less than 10 years.  In two more years it will be an 8 year bond, it doesn't stay at 10.  As time goes on the bond duration shortens, but my interest rate is locked in.  The yield curve will work in my favor and help me from losing my shorts (not that I really care since I plan to hold it till it matures and get my money back). 

Ares Capital is a BDC whose common stock trades under ARCC.  This exchange traded debt is currently trading around $25 which is its par value.  S&P rates it as BBB (investment grade).  I like the yield on this one. 

PBI-A: Pitney Bowes 5.25% Notes
This one is very similar to ARU.  It's a 10 year note maturing in 2022, callable starting November 2015, and is rated BBB.  The yield is a little lower, but perhaps the underlying company is a little more reliable.  Most dividend investors are aware of Pitney Bowes.  Most of us know the high dividend on the common stock is a concern.  I wouldn't be comfortable holding the stock, but the bond is a different story.  PBI just needs to stay in business for the bond to do its job.  Dividend increases, decreases, and freezes are not as important to the fixed income investor.  I can lock in a yield over 5% for the next 10 years.  The 10 year treasury current pays less than 2%.  Quite a nice premium for taking additional risk.  PBI-A is currently trading around par value.

GS-PI: Goldman Sachs 5.95% Non Cum Preferred
This is a new issue from Goldman Sachs that is currently trading under par value.  S&P rates this as BB+ which is very high for a preferred stock.  Since preferred are lower in the capital structure they typically have lower ratings, but higher yields when compared to bonds.  Virtually all bank preferreds are non cumulative.  This one is no exception.  Goldman Sachs is probably the biggest bunch of shysters I can think of in American business, but I invest to make money, not to debate ethics.  This issue is currently offering a nice yield at a price under par, plus it isn't callable for 5 years.

I'm a fan of exchange traded debts and preferred stocks for a few reasons.  They are easier to buy and sell compared to traditional bonds.  They typically make quarterly payments instead of semiannual.  An investor can buy odd dollar lots instead of $1,000 lots.  The commissions are usually lower.  A downside is the limited selection to choose from. 

With stocks approaching all time highs, other types of investments are looking more and more attractive.  I've already boosted my lending club deposits...


  1. CI - Previously you were putting $50 per month into your LC account, how much have you increased your contribution?

    I have had a Lending Club account since the spring of 2009, but recently opened a new Roth IRA account with 10k. Should be fun tracking it as it becomes fully invested. If you are curious, I posted my most recent investment criteria at my site.

    In looking at your criteria, what were your methods to develop those selections? (36-month only, <15k loan amount, etc)

    1. I increased to $100/month. I still need to be convinced that it is viable long term. I'm a worry wort and want to make sure this isn't just a passing fad.

      I posted my loan criteria last November: http://compoundingincome.blogspot.kr/2012/11/lending-club-update.html

      Mostly B loans show up. I typically only invest in B5 through D.

      I will definitely check out your site when I have a minute! Cheers!

    2. Certainly comfort is key with any investment!

      Thanks for the link! I was wondering how you determined your criteria; did you use any particular testing or analysis?

    3. I played around on lendstats for a bit, but wasn't sure how accurate the data was.

      Basically I'm looking for honest borrowers who want to repay and have the means to repay. So things like past deliquincies, employment history, and debt/income are important to me. Many times I've seen that the debt/income is listed as being under 10%, but if you compare the actual monthly loan payment to monthly income it can be well over 10%. It's something the screen doesn't catch. A large loan payment is a big hurdle to actually paying every month imo and a reason I cap loans at $15,000. On the other end of the scale, a very small loan could easily be paid off early with a simple tax return or something similar.

      Just my thoughts, I think you know more about it than me.

  2. CI - I don't own any bonds as I rely on my defined benefit pension plan as the fixed income portion of my portfolio.

    Have you ever considered buying a laddered bond ETF? Prior to having a defined benefit PP, I used to own some, including a 5 year laddered corporate bond ETF (i.e. 20% of the bonds expired in 1, 2, 3, 4 and 5 years). I liked it because it got me into a diversified bond portfolio without having to invest nearly the capital I would have needed to create my own diversified bond portfolio.

    1. yes I have considered a few bond funds that are listed on my Watch List page. In general I do not like funds. Why pay someone to do the research when I'm more than happy to do it? Most bond funds are perpetual which is a huge turn off for me. A few that I like:

      -EMB: I do not know how to buy or evaluate emerging market bonds. It make sense to have someone do it for me for a fee.

      -BSCK: This is a bond fund with a maturity date. Pure genius! Much like holding a bond to maturity except you own a bunch of them and pay a management fee. I do not want any perpetual bond funds if I can help it!

  3. I still believe you can find some cheap stocks out there. I believe the market will run up much higher than we can think of.

    1. I don't disagree, but I do feel stocks are pricey at the moment. The fact is my allocations are out of whack and I'm not opposed to bonds. I have an order in ARU but it has spiked upwards the past few days.

      I will not be abondoning stocks. I periodically buy fixed income, it's quite normal for me. I bought some preferred stocks last year with positive results.