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By Bob Moeller
WEAC Member Benefits
December 2007
Financial
Planning Seminars
Achieving
Financial Independence
How to buy By Bob Moeller First, set up a discount brokerage account. You can check out possibilities on the Internet such as www.fidelity.com, www.vanguard.com, Then you check out some possibilities using the search feature at www.quantumonline.com. You can do your trading over the Internet. (Don’t be afraid of this!) For this type of situation you are looking for preferred stock, upper investment grade, with a coupon of 6% or less, selling for a discount. The lower the coupon rate, the less likely it is that the stock will be called in, and if called, the more likely you will collect more than you paid because you managed to buy it for less than the call-in price. |
By Bob Moeller
When members are about to retire, or are already retired, they frequently become more conservative about how they invest their money.
Often spouses don’t have a guaranteed pension like members do and they become interested in some kind of secure income possibility. Recently a member who had managed to build up substantial assets in IRAs and TSAs shared his conclusion: “If I could just earn 6% per year without a lot of risk, I’d be happy and financially comfortable.”
This article compares two options for doing that – (1) a lifetime annuity arrangement through an insurance company or (2) investing in top investment-grade preferred stock (rated AA2 or better). The goal: get the same income for life, but be able to leave the principal or at least most of it to children rather than to an insurance company. My example deals with a husband age 62 and wife age 60. They wish to invest $100,000.
First they checked the Web site www.immediateannuities.com and found it would pay them $542 per month for their lifetimes. Vanguard annuities quoted $537 per month. In both cases, their heirs would get nothing after their deaths. The couple found these quotes on the Internet, and would want to personally talk to each company before making any final decisions and make sure the Internet numbers were correct.
Now, I turn to the preferred stock alternative. I am using just one example, Wells Fargo Bank, for purposes of this article, but if this were real life our hypothetical couple would select from several sources in order to get diversification. [Other options might include CitiGroup (CprS), Bank of America (IKL), or General Electric (GED)].
Our couple decides to purchase Wells Fargo Capital VIII (GWF), a trust preferred stock. It was issued in 2003. It is rated Aa2/AA- by the two big rating agencies. It pays a quarterly dividend of $1.40625, which is 5.63% of its $25 issue price. However, it sold for only $19.42 on November 19 at the time this article was written. At that price, the stock yields 7.24% per year, which generates about $600 a month for our couple (actual payments are made quarterly).
The issue is callable in July 2008, but if Wells Fargo calls it in, it has to pay $25 per share, a nice 15% gain from what our couple paid for it. (Frankly, I don’t see Wells Fargo calling in this issue, because in effect it is borrowing money for 5.63%, and I think it will leave it alone until maturity. But, if it does call it, our couple gets 7.24% to call date plus a nice profit.)
The stock matures and thus must be called in August 2033, at which time our couple get back $25 per share even though they paid only $19.42. The couple will be in their mid-80s then. They (or their heirs) will have received a nice pension for 25 years and then gotten back more than they invested. They can then buy a very nice lifetime annuity at age 85 if they want to, but they won’t want to, of course.
So our couple invested their $100,000 in this preferred and other similar preferreds with investment-grade ratings. Their $100,000 bought them a little more than 5,149 shares, which generated more ($600) per month than the annuity examples ($537-$542). And they get to leave more than the original investment to their kids.
I sometimes see fellow writers recommending life insurance company annuities. This preferred stock approach looks superior to me!
A word about credit ratings
Standard & Poors and Moody are two major companies rating financial strength for companies. They use similar designations. Top is AAA, which is held by very few companies (GE is one, their preferred GED sells for about $23.50 and yields about 6.2%). The next ratings are AA+, AA, AA-, or AA1, AA2, AA3. Then, A+, A, A-. Finishing up the Investment Grade is BBB+, BBB, BBB-. Anything lower is not investment grade and is commonly referred to as junk. I certainly would feel comfortable with a mixture of preferreds, all rated AA- or higher.
You can research preferred stocks at www.quantumonline.com.
For a sample list of the those preferred stocks and for help in using quantumonline, e-mail Diana Buchholz at buchholzd@weac.org.
Posted December 14, 2007