Taking Stock: Finding a winning junk bond

Dear Mr. Berko:
What do you think of an ETF called SPDR Barclays High Yield Capital Bond? My broker recommended that I buy 200 shares at $38 as a speculation for my growth and income securities account because it yields 12 percent. My brother likes the stock (he also is retired) and recommended that I purchase 400 shares and borrow 50 percent of the money from the broker at 5 percent interest. He said this way, I would get a 19 percent return. This sounds fantastic to me. I asked my broker, and he said, “It’s up to you.” Please tell me if this is a wise move and if this SPDR thing makes sense. If this margin concept makes sense, I could “margin” more of my portfolio and really increase my dividend income. What say you?
C.R., Akron, Ohio
Dear C.R.:
Most folks do not know that the SPDR or “spider” designation is an acronym for Standard & Poor’s Depositary Receipt. The alphabet soup of Wall Street acronyms can be intimidating to most civilians; however, a small dose of SPDR Barclays High Yield Capital Fund (JNK – $39) could be an attractive diversification asset for a conservative growth and income portfolio.

This is an ETF or Exchange Traded Fund in which 80 percent of its $4.6 billion bond portfolio is invested in junk securities that represent the High Yield Bench Mark Index, while the remaining 20 percent or $1 billion is invested in other high-yield issues. I like the junk bond market, which looks like it’s beginning to come back.

JNK was an Initial Offering Price in January 2008 at $45 per share and paid its first monthly dividend of 30 cents. The monthly dividend during 2008 ranged between a low of 30 cents per share and a high of 37 cents. The dividend varies each month because the lads who run JNK make frequent portfolio changes and don’t let grass grow between their toes. JNK’s trailing 12 months of dividends totaled $4.81 and produced a 12.6 percent current return. 

I commend your broker’s 200-share recommendation because I think JNK is a Jim Dandy way to anticipate in the very volatile junk bond market using “kiss of death” issues that most pros wouldn’t touch wearing a Hazmat suit. But the lads at JNK have their fingers on the pulse of issues like American International Group, Intelsat Bermuda, GMAC, Tax Resources, Wind Acquisition and other kinky names that might take your blood pressure to the “megasphere.” They seem to sense when the pulse of certain issues becomes dangerously weak and sell them from the portfolio. Anyhow, there’s nothing wrong with having an issue or two in the frying pan to give your portfolio some flavor.

But your brother’s advice to use the $7,600 you must pay for 200 shares and purchase another 200 shares on margin is dangerous. It doubles your danger but only increases your income (after paying $375 interest of 5 percent on your borrowed money of $7,600) to $1,453, which is a 19 percent return on a $7,600 cash investment. This maneuver is like going from a small frying pan into a big frying pan. 

And I’m disappointed that your broker did not forcefully put the kibosh on that scheme. The only folks I know who get 19 percent annual returns (or more) in this market are Goldman Sachs, Merrill Lynch, Bank of America, JPMorgan and the like. And they can get these returns because they control the market. And while your broker may borrow 50 percent to buy these assets, Goldman et al borrowed 98 percent, which caused the bond crash on Wall Street. Sometimes a little bit of greed can become a consuming addiction. Those who get the bug either fail, go broke or became enormously successful. And those who became enormously successful are either reviled by their friends or are in trouble with the law or both. 

Just buy 200 shares, don’t sign any margin papers to borrow money and tell your brother that I think he’s a blithering idiot.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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