Increase Your Portfolio’s Preferred Stock And Bond Yields With No Additional Risk

Introduction

In this article, I identify real opportunities to increase your yield by swapping securities that you may hold for much higher-yielding securities that are similar to, or almost identical to, the securities you hold. In other words, you can increase your yield without taking on any additional risk.

Before reading this article, you may want to read my recent educational article on strategies for increasing your total return on your fixed-income portfolio. If you haven’t read this article, I recommend it for fixed-income investors. In that article, we discussed strategies for increasing your portfolio’s total return. These are the strategies that we employ at our Conservative Income Portfolio service on Seeking Alpha. And “swapportunities” is just one of our strategies.

Great Swap Suggestions

Sell Compass Diversified Preferred “A” “B” and/or “C” And Buy Compass Diversified 2029 Bond

Because at Conservative Income Portfolio, we cover not just preferred stocks and baby bonds, but also traditional bonds. We can provide swapportunities across all types of securities. In this case, we are selling a preferred stock in order to buy the bond from the same company improving yield, credit risk, and lowering price risk.

In this case, Compass Diversified (CODI) Preferred “A” (CODI.PA) is currently yielding 7.5% while the 2029 CODI bond (CUSIP U2037WD1) last traded at a 9.3% YTM. So, unless you have a reason that I can’t fathom, sell CODI-A (and CODI-B and CODI-C for that matter) and buy this 2029 CODI bond if you can get a significantly higher yield. And even if you don’t own any of the CODI preferred stocks, this bond looks appealing.

Sell Pitney Bowes 2043 Baby Bond and Buy Pitney Bowes March 2027 Bond

Here is one of the most egregious mispricings in the market. The 2043 baby from Pitney Bowes (PBI), with the symbol PBI.PB, currently has a yield-to-maturity (YTM) of 9.8% while the March 15, 2027 PBI bond (CUSIP 724479AP5) has a 21% YTM. If this doesn’t say it all, then I can also add that PBI-B also has a 1 notch lower credit rating than the PBI bond with CUSIP 724479AP5.

So, either the owner of PBI-B should do the swap or just run from PBI-B.

Buy Oxford Lane Term Preferred (OXLCN) and Sell Oxford Lane Term Preferred (OXLCO)

Unlike most preferred stocks, which are perpetual, these preferred stocks from Oxford Lane Capital (OXLC) have maturity dates. OXLCN matures on 6/30/2029 while OXLCO matures on 8/31/2029. So these term preferred stocks are virtually identical. Yet OXLCN last traded at a 9.7% YTM while OXLCM has a YTM of only 8.1%.

OXLCN has been beaten mercilessly by an unrepentant seller. If you own OXLCO, a swap is a must, but OXLCN is also very mispriced against other very similar securities from Eagle Point Credit and Priority Income, making it relatively extremely cheap security. In fact, if you own Priority Income Preferred “D”, which also matures in 2029, it has a yield of only 7.6% versus 9.7% for an almost identical term preferred stock. So do the swap. This market is really offering incredible swapportunities, and in this case, also an excellent buying opportunity for OXLCN.

Sell Braemar Hotels Preferred “D” and Buy Braemar Hotels Preferred “B”

Braemar Hotels Preferred “D” (BHR.PD) is grossly overvalued relative to BHR.PB. Currently BHR.PD sells for $24.58, with an 8.4% current stripped yield while BHR.PB sells for $14.75 and yields 9.4%. So 2 identical securities, in terms of credit and interest rate risk, have very different yields and upside price potential. BHR.PB not only provides 1% higher yield but also massively more upside price potential at a price of $14.75 versus $24.58.

While BHR.PD has only dropped in price about 75 cents from 1 year ago, BHR.PB has dropped more than $7.00. If you own BHR.PD, you must either swap it for BHR.PB or dump.

Sell SCE Trust Preferred “G” and Buy SCE Trust Preferred “L”

In this example, SCE Trust Preferred “G” (SCE.PG) sells at $20.61 while SCE Trust Preferred “L” (SCE.PL) sells for $18.48. But SCE.PG only pays out a dividend that is 2.5 cents greater than SCE.PL. The current yield on SCE.PL is 6.8% while the yield on SCE.PG is only 6.18%. So the yield on SCE.PL is about 10% greater than that of SCE.PG while SCE.PL also has more than $2.00 additional price upside to par.

Basically, SCE.PL is discounted by $1.80 per share versus SCE.PG. So a swap is a no-brainer here. Or you could just sell SCE.PG due to its relative overvaluation.

Final Thoughts

The price dislocations and mispricings are so good and so plentiful now. You don’t need to add to your portfolio in this treacherous market to increase your return. You can do wonders by simply upgrading your portfolio and taking advantage of swapportunities. By covering all asset classes at Conservative Income Portfolio, including traditional bonds, we see an abundance of swapportunities currently as well as some just plain undervalued and overvalued securities.

And to be clear, I am not recommending SCE.PL, BHR.PB, or the Pitney Bowes bond. Sometimes these swapportunities point out gross mispricings where you virtually must take some action if own the overvalued security, obviously selling it. But you don’t have to also buy the relatively undervalued security.

And for those unfamiliar with pairs trading, that is when you buy one security and short another hoping to profit from the perceived mispricing between the 2 securities with the market eventually pricing them more rationally. These trades eliminate market risk because you don’t care what the market does. It is all about the relationship between the security that you are long and the one that you are short. These swap opportunities are ideal for pairs traders, and in fact, this market should be ideal for pairs traders if you can find overvalued shorts whose borrow fees are relatively low. That is not always so easy.