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...