TAKING STOCK: Preferred issues for the discriminating investor

Dear Mr. Berko:

We have $30,000 in our joint account that we want to invest in a few issues that will pay us between 9 and 12 percent for the next few years. We know this is risky, but if we used some bonds or preferred issues rather than common stock, the principle and dividends will be safer. We're in our 70s, our kids and grandkids are taken care of and we can afford moderate risk. Our broker said this is impossible and that there isn't anything he can recommend for us. We would appreciate any recommendations.

CM, Vancouver, Wash.

Dear CM:

Earning dividends or interest of 9 to 12 percent for the next few years with a modest degree of risk is easier than most think. You must be mindful that you have an average broker. This doesn't mean he is a bad broker; rather, he has average skills, an average IQ and can make only average recommendations. Therefore, you get only average advice.

Unfortunately, there are too many average brokers employed by Dean Witter, Merrill Lynch, Edward Jones, Oppenheimer, Raymond James, JPMorgan, Smith Barney, etc. And as a result, there are too many investors who need superior advice but have to settle for average advice.

Oh, well. That's how the Mercedes Benz. The following suggestions may help you.

Banco Santander, S.A. (STD-$7.71) has a preferred issue listed on the New York Stock Exchange called Santander Finance Preferred 10.5 Percent Non-Cumulative Guaranteed Series 10. It answers to the ticker symbol STD-E, currently trades at $25.95 and matures at $25 in September 2014. This issue is rated "A-" by Standard & Poor's, and the $2.625 dividend translates to a current yield of 10.1 percent. STD-E pays quarterly and trades ex-dividend on the 29th of March, June, September and December. This preferred also qualifies for the 15 percent tax rate.

Another issue is Lucent Technologies Capital Trust Series 1, 7.75 Percent Cumulative Convertible Preferred (LUTHP-$640). The trust trades on the NYSE, matures in March 2017 and is rated CCC by S&P. The annual $77.50 dividend is divided into four quarterly payments of $19.375 and trades ex-dividend on the 15th of March, June, September and December. This busted convertible is now guaranteed by Alcatel-Lucent (ALU-$1.59), a $21 billion-revenue international communications company. The dividend yields a sweet 12 percent. LUTHP does not qualify for the 15 percent tax rate.

You must also consider Bank of America 7.25 Percent Non-Cumulative Convertible Preferred Stock Series L (BAC-L) with its par value of $1,000. It currently trades at $802 and is listed on the Big Board. This busted convertible-preferred is callable on Jan. 30, 2013 at $1,000, is rated BB+ by S&P and will provide a current return of 9 percent. The annual $72.50 dividend is payable quarterly at $18.125 and trades ex-dividend on the 30th of January, April, July and October. BAC-L qualifies for the 15 percent tax rate.

Invest $10,000 in each of these issues, and poof! You'll earn 10 percent on your money. Certainly these three issues are not Blue Chip-quality. However, $55 billion-revenue Banco Santander, with 15,000 branches worldwide, will still be making loans when your children's children are having children. Alcatel will be designing software and making data connections as long as there are data to deploy. Bank of America, founded over 100 years ago, should be here for another 100 years.

Unique economic circumstances here and abroad make these issues attractive for those who can be comfortable with modest risk. There are many more issues (preferreds, convertible bonds, bonds and hybrids) with current yields of 9 to 12 percent that conservative income investors can be comfortable owning in the risky corners of their portfolios. And a wise, knowledgeable and experienced broker - of which there are so few - will be able to help investors plan a portfolio of like issues. However, your broker would be better employed selling used cardiac stents.


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 website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Fri, Jan 27, 2012