My family and I recently had the chance to visit one of the new indoor water parks here in the Poconos. It was quite the experience! The resort has pools, water slides, a lazy river, and even a swim-up cocktail bar. I was overwhelmed with all of the sounds and water flying from all different directions, but my kids had an amazing time. I think one of them said it was “better than Christmas.”
My older son and I spent much of the day in the wave pool. I am not exaggerating when I say that we jumped over waves for five straight hours. After our epic swim, I was exhausted. I felt like I had just run a marathon. Muscles I never knew existed – ached. My son, on the other hand, was raring to go. We had a little something to eat and then went to explore the rest of the lodge.
Since the park is specifically designed for children, we discovered a number of non-water related activities. The most popular was a treasure hunt. The hunt involves a magic wand, which is waved at various objects throughout the building to un-lock clues to the location of an ancient treasure. My son eagerly ran up and down the stairs hunting down leads. I could barely keep up with him, my legs hurting from the day’s pounding. Eventually, the great prize was revealed, and I was mercifully allowed to sit down and relax for a bit.
For current investors, the art of finding an investment paying an attractive rate of interest is like finding a hidden treasure. Rates are so low that it is hard not to get dispirited by the lack of alternatives. The days of going to your local bank and buying a certificate of deposit (CD) paying 4% to 5% are gone. You have to scrounge, claw, and search for investments paying any semblance of a consistent payout. You can find a gem or two, but it might not be in the place you normally expect.
The following investments are a bit obscure, but they are prized for above average return and could be that treasure for your portfolio.
Investors hungry for higher yields have recently been investing heavily in preferred stocks. These instruments are essentially a hybrid between a common stock and a corporate bond. The stock has first priority over the company’s assets, like a bond, but possesses no voting rights like a common stock. Preferred stocks normally pay out a higher dividend than a government backed bond or CD coupon, but on the flip side, their potential appreciation in price is limited to a few dollars up or down. Their distributions are predictable and provide a steady stream of income. Most preferred stocks have a final redemption date or a call provision allowing the issuing company to redeem the stock at some point in the future.
The website www.dividendyieldhunter.com is a great resource for anyone interested in preferred stocks. It provides a great list of the various offerings and their respective coupons.
Primarily issued by financial institutions like banks, floating rate notes are a debt instrument (i.e., bond) whose interest rate is variable. This means that the note does not have a set interest rate until maturity. Floating rate notes usually reset their underlying interest rate every month or two. Floating rate notes become quite popular in times where an interest rate increase from the Federal Reserve is expected because the note’s rate reset will be at the higher rate. Just like today! Floating rate notes do have certain negatives. The most apparent is that notes are not “high quality,” meaning their credit rating is below that of a federally backed bond, so when interest rates do move up or down the underlying price of a floating rate note will adjust as well. When stepping into the floating rate arena, my recommendation is utilizing a floating rate mutual fund or exchange traded fund (ETF) comprised of a basket of numerous floating rate notes. A good choice would be the T Rowe Price Institutional Floating Rate Fund (RPIFX) which has solid performance and low expenses.
Exchange Traded Debt or so-called “Baby Bonds” are rarer than preferred stock or floating rate notes, but could be an income-generating investment for your portfolio. The bonds are traded on a stock exchange, instead of bond markets. They are called “Baby Bonds” because they are often issued in smaller denominations ($25 per bond) than typical corporate debt. The debt has a lower priority than any of the corporation’s secured debt. Their maturities are usually over ten years, so their coupon or interest rate is higher than many other debt instruments. However, since the maturities are so long, when interest rates rise, the price of current baby bonds will fall. This should not matter if you intend to hold the bond until maturity, but this could be a concern if you desire to sell it during its term.
The above described alternatives are an excellent way to diversify your investment portfolio with yield bearing investments. Yet, with their increased return potential, they also come with added risk. As such, they are not intended to take the place of traditional fixed-income investments in highly-rated government and corporate bonds. If you want to discover which investments are right for your portfolio, contact your local financial advisor because as I like to say, “Local advice is often the best advice.”
The Honesdale National Bank and its employees do not render legal, tax, or accounting advice. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax, and accounting consequences of any suggestions offered herein. Furthermore, all decisions regarding financial, tax, and estate planning will ultimately rest with you and your legal, tax, and accounting advisors. Any description pertaining to federal taxation contained herein is not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Code. This disclosure is made in accordance with the rules of Treasury Department.