One huge benefit of higher interest rates is that the yields on fixed-income rise. Fixed-income investments are always priced relative to other fixed-income options, like U.S. Treasuries.
One fixed-income option available to investors looking for higher yields is preferred equity. Preferred equity is often "perpetual", which means that it will remain outstanding indefinitely until the company chooses to call it. With bonds and other fixed-income options that have maturity dates, our high yield can only last until the maturity date. Then, we have to reinvest at whatever the going rates are at that time.
With perpetual preferred, we can buy at a discount to par and collect the higher yield indefinitely until the company decides to call it. Since we bought at a discount to par, we will get to realize a capital gain when it is called. Yet, even if interest rates decline, calling preferred stock is often near the bottom of management's priority list. Frequently, we can collect higher yields for much longer than we would if we bought the company's five to ten-year debt.
Fixed income is essential for any serious income investor. At HDO, our Model Portfolio holds over 50 preferred equity picks. With preferred securities being so thinly traded, we rarely provide coverage on preferred to the public. We want to provide a special sneak peek at what HDO members get every weekend, our highly prized preferred security coverage.
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