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‘Higher For Longer’ Investments

May 6, 2024 | Member Submitted

Submitted and Written By David Vomund of Vomund Investment Management

After last week’s Federal Reserve meeting investors were once again wondering what’s next for interest rates.  Will the Fed cut rates this year or will more data on sticky inflation force another hike?  While that debate continues, we can at least conclude that rates will eventually settle at a level much higher than just a few years ago.  The neutral rate (neither stimulative nor restrictive) is higher than previously thought.  What will that mean for investors?  Read on.

In my March 17, 2023 article titled “Good News for Savers” I listed several securities that work well in a rising rate environment.  They also work well when rates remain high, just as they are now.  I’ll list them again and give some new ones.

Few investors (and advisers) own or even know about adjustable-rate (or floating-rate) preferred securities.  Those securities yield more when rates rise.  U.S. Bancorp offers a Floating Rate Series B Preferred (USB-H).  The floating rate is 3.5% or 0.60% above three-month Libor, whichever is higher.  At its current price of $19.9 this security yields 6.8 percent, is rated BBB, and pays qualified dividends.

Other banks/brokerages also offer floating-rate preferreds.  The Goldman Sachs Series D (GS-D) yields 6.99 percent and is rated BB+.  The Morgan Stanley Series A Preferred (MS-A) yields 6.2 percent and is rated BBB-.

In my previous article I wrote about an adjustable security that I called a “special situation.”  The largest mortgage REIT, Annaly Capital Management, offers a 6.95% Series ‘F’ preferred (NLY-F).  The rate on this security is three-month LIBOR plus a spread adjustment of 5.25 percent.  That puts its current yield at 10.5 percent.  When this security was issued I doubt that management ever thought rates would be this high so they may call the security at its $25 par.  Because of a potential or even partial call, I would only buy it below $25.  It’s above that now.  

A better alternative is Annaly’s newer 6.75% Series ‘I’ Preferred (NLY-I).  It yields 6.7 percent but its dividend begins to adjust on June 30 so its yield will jump to 10 percent.  Annaly preferreds do not pay qualified dividends so they are best suited for IRAs. 

Of course a money market fund now yielding 5.2 percent is always an option and fixed-rate preferreds are attractive.  I’ll list my favorites in an upcoming article.  Whether you own adjustables or fixed-rate securities (or both!), it’s a good time to be an income investor.  

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

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