MORE income than a share, SAFE like a bond

by , 18 February 2019
MORE income than a share, SAFE like a bond
Last week, I explained the power of income investing.

And how it can boost the overall performance of your portfolio…even in the worst of times.

I also revealed (in short) some of the best ways to start generating an income for your portfolio.

Today I'd like to delve deeper into one of those income investments.

The reason why, is because they offer more income than a normal share and are just as safe as investing in a bond - making it an investment you should consider for your portfolio.

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The basics of preference shares
 
If a company needs to raise capital, it has a few options. It can borrow money from the bank, it can issue bonds or it can issue preference shares.
 
By investing in preference shares, you’re buying a mixture of equity and debt. In other words, it’s a mix of a bond and a share in one.
 

 
What’s more, preference shares give you the majority of the benefits of investing in shares, apart from voting rights. But due to the debt element, you get a ‘guaranteed’ percentage dividend.
 
So when it comes to a company distributing its profits, preference shareholders are first in line to receive dividends.
 
If the company runs into trouble, it must pay preferred shareholders their dividends before paying common shareholders. In many cases, if the company missed any dividend payments, preferred shareholders have to receive all of their missed dividends before payments to common shareholders can start again.
 
And if there is a bankruptcy, preferred shareholders come after bondholders but before common stockholders in order of who receives funds.
 
Lastly, while preference shares trade on a stock exchange, and while prices move according to supply and demand, you will hardly ever see a major change in the prices.
 
Why?
 
Well, preference shares are mainly bought because their dividend yields tend to be high and fairly secure.
 
So if the price goes too high, the yield will be too low to be attractive. For example, a preferred stock with a 6% yield at R25 pays an annual dividend of R1.50. If the stock price rises to R50, that R1.50 dividend now represents a 3% yield.
 
The companies that offer preference shares are mainly financials and banks. But there are industrial and logistics companies that offer them too.
 
If you want exposure to preferred stocks but don't feel comfortable selecting the stocks yourself, you can always choose an exchange-traded fund (ETF) like the CoreShares PrefTrax.
 
But I prefer one preference share above all others.
 
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A preference share with optimal balance of high liquidity and high yield of 12%!
 
There’s a preference share available right now that pays out dividends bi-annually at 88% of the South African prime rate (currently 10.25%). The best part is, if any dividends are in arrears, they increase their pay-out ratio to 100% of prime.
 
In other words…
 
Unlike most yielding assets in equity markets that perform poorly when interest rates rise, this preference share actually pays out more!
 
In addition, most preference shares listed on the JSE lack liquidity. This is a problem when it comes to buying and selling.
 
So what you’re looking for in the ultimate preference share is good liquidity coupled with a high yield.
 
For example, Invicta Holdings’ preference shares are yielding the highest but they come with escalating credit risk from both the company’s operations and potential tax claims that it’s currently facing.
 
Likewise, Imperial Holdings’ preference shares have the highest liquidity but you pay for this through a lower yield.
 
Whereas, my favourite preference share has…
 
  • The second highest dividend yield of 12% amongst the listed comparatives
     
  • The second highest liquidity in the market
 
Thus, it demonstrates the optimal balance of high liquidity and high yield with the opportunity for capital growth as well.
 
Everything you need to know about this preference share, you can find in The Little Book of Big Income
 
See you next week,
Joshua Benton,
Managing Editor, Real Wealth
 
P.S. What steps can you take to start generating a REAL income today? It’s as simple as reading The Little Book of BIG Income. This book will show you multiple ways to generate consistent income to boost your overall retirement portfolio.



MORE income than a share, SAFE like a bond
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