Earn 30 Times Your Money

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Lizbeth Casey
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1 Earn 30 Times Your Money Guaranteed Income Certificates

2 Want to Invest Like Buffett? Buy Preferred Shares It s no secret that Warren Buffett the Oracle of Omaha is a fan of preferred shares. With their predictable, bond-like returns, as well as possible conversion to equity shares at favorable rates, preferred shares meet Buffett s investment criteria. They have low downside risk with some upside potential. Investors get paid as they wait for Mr. Market s dour mood to get cheerful again. Best of all, when conditions are right and there s fear among investors, Buffett can lock in high yields on preferred shares and get paid handsomely to wait while the markets turn around. How much of a yield can Buffett get? While most investors can get from 5 to 7 percent, Buffett was able to lock in 10 percent yields in preferred stakes of financial firms Bank of America (BAC) and Goldman Sachs (GS) back in These preferred offerings weren t available to regular preferred share investors. Even during the financial crisis, publicly-traded preferred shares never reached such a high yield. The Goldman stake also came with an option to buy shares at $115 per share a discount to the $125 shares were trading to at the time in Goldman redeemed the preferred shares in Berkshire exercised its option to buy shares in The end result? A $3.2 billion gain on an initial $5 billion stake. That s a 64 percent gain in just a few years. Berkshire now owns about 3 percent of Goldman shares. While Buffett received a handsome payment, Goldman also benefited from the deal. It was able to buy Buffett s powerful reputation at a time when it faced criticisms for its involvement in the financial crisis. Preferred shares aren t just a tool for financial companies either. Buffett bought a preferred stake in General Electric (GE) in late 2008 that also paid him a 10 percent yield at a time when the dividend was slashed for common shareholders. In the 2012 letter to shareholders, Buffett stated that Berkshire s 50 percent stake in H.J. Heinz, the ketchup manufacturer, was partially funded by preferreds: Berkshire will also invest $8 billion in preferred shares that pay a 9 percent dividend. The preferred has two other features that materially increase its value: at some point it will be redeemed at a significant premium price and the preferred also comes with warrants permitting us to buy 5 percent of the holding company s common stock for a nominal sum. In 2013, Buffett moved further along the preferred share path, providing financing for Burger King s planned tax-inversion deal. Under that deal, Buffett provided $3 billion in capital for Burger King to buy up Canadian restaurant chain Tim Hortons. By moving its headquarters to Canada, the newly combined entity could save millions of dollars in U.S. corporate taxes each year. However, given the public outcry over this plan, the combined company has yet to move its headquarters. Meanwhile, as the controversy rages, Buffett earns 9 percent on the preferred share stake in Burger King. In a world of low interest rates and fast-moving stocks, investing in preferred shares seems like a solid balance to produce a meaningful income in a low-risk way. But the financial crisis wasn t Buffett s first foray into the world of preferred stock investing. Far from it; he s been a believer for decades. His last period of major activity in the preferred space took place in the late 1980s and early 1990s. That coincides with falling interest rates and the rise of so-called junk bonds, high-yielding bonds that carried heavy corporate risk. We see that once again Buffett decided to go with the steadier returns of preferred shares instead. He took a stake in Salomon Brothers in 1987 (the firm later merged with Travelers and became part of Citigroup). Those convertible preferred shares yielded 9 percent. He also bought $358 million in convertible preferred shares of USAir Group, yielding 9.25 percent. Although the airline stocks took a cyclical dive, and Buffett initially wrote down the value of these preferreds, he was eventually able to close out the position at a profit. Champion International, a forest products firm, also issued preferred shares to Buffett in Like some of Buffett s other preferred share stakes around this time, the goal was to bring Buffett on board as a silent partner and try to stifle a potential hostile takeover. 2 TheHighIncomeFactor.com Special Report

Finally, there s American Express (AXP). One of Buffett s core holdings, he invested $300 million into the preferred shares in 1991.

3 Finally, there s American Express (AXP). One of Buffett s core holdings, he invested $300 million into the preferred shares in Unlike most of the other preferred offerings, these shares had conversion covenants that acted as a price ceiling. They yielded 8.85 percent. Going back even further, in 1942 an 11-yearold Warren Buffett made his first trade buying three shares of Cities Service Preferred. He quickly sold after the oil company s preferred shares showed a slight profit. Shares later sold even higher. That provided a fantastic first lesson for investors buy and hold can be your friend, especially when you re earning a sizable dividend yield. Five Ways to Benefit For decades, the timeworn advice has been to pad your investment portfolio with both stocks and bonds. Why? Well, because it worked the stocks provided capital appreciation (and in some cases, dividends to boot), and the bonds provided a safer way to shield your money while earning a steady income stream. But today, that advice may be in jeopardy. That is, a stock and bond mix may not provide quite enough diversification to protect you against what the market has in store. Consider the stock market. In August 2015, we had our first correction since 2011 when the market plummeted 10 percent from its highs. By 2017, the S&P 500 s price-to-earnings (P/E) ratio has reached level not seen since the tech and housing bubbles, meaning there s potentially downside to come. Meanwhile, a 30-year bull market in bonds is If interest rates were to rise to their historical averages, existing bond prices could lose as much as 40 or 50 percent. likely at or very near the end. There s a lot more room for rates to move higher than lower from here, and the U.S. Federal Reserve has been rattling its saber as far as future hikes. That s fine for newly issued bonds, but it could devastate existing bonds. If interest rates were to rise to their historical averages, existing bond prices could lose as much as 40 or 50 percent. Even if rates move up only a couple percentage points, there is still significant downside. Why take all that risk? Even if bond prices don t budge, you re still getting a near zero percent return. Here s the good news. There is another way a way to diversify your stock and bond holdings, and still earn a respectable income. Another asset class exists that can provide some answers. Preferred stock is class of ownership in a corporation that has properties of both stocks and bonds. A key advantage of this type of security is that historically it has had a very low correlation to both the stock and bond markets, which makes it an excellent choice for diversification and balance. When a company issues a preferred stock, it sets the annual dividend and sells the shares at a preset price, typically $25. The initial coupon rate (yield) is the fixed payout as a percentage of the issue price (for example, a share paying $1.50 annually yields 6 percent). Payments are typically made quarterly. A preferred stock is like a regular or common stock in two ways: 1. DIVIDENDS. This relates to tax treatment of the payout. Most preferred issues have fixed payments classified for tax purposes as dividends rather than interest. Bond interest is taxed as ordinary income, but dividends are only subject to a maximum tax About Tom Hutchinson I ve worked in finance my entire career, from the back office of a Wall Street firm to the floor of the New York Mercantile Exchange learning how markets work. Eventually, I became a financial adviser where I met with thousands of investors and managed the portfolios of hundreds over the course of about 15 years. I left my career as a financial adviser, writing for The Motley Fool as well as StreetAuthority LLC, researching companies, industries, and markets. In The High Income Factor, I can bring you the full benefit of my years of investing experience. 3 TheHighIncomeFactor.com Special Report

4 rate of 15 or 20 percent. This fact makes the after-tax income of preferred stock higher. 2. LIQUIDITY. Preferred stock can be bought and sold at a quoted price any day the market is open. (Preferred stocks are easy to purchase, just like you would buy any stock through your brokerage account.) Most bonds, meanwhile, are not sold on exchanges and the price is not openly disclosed. Also, most preferred issues sell in bite-size $25 denominations where any quantity of shares can be traded. Bonds are usually sold in $1,000 increments with minimum purchase amounts of $5,000, $10,000, or $25,000. A preferred stock is similar to a bond in six ways: 1. FIXED PAYMENT. Preferred stocks pay a very specific and bankable fixed payment that doesn t change, unlike a stock dividend. 2. LESS VOLATILITY. These investments are not nearly as volatile as stocks. The price stays steady compared to stocks, and the price chart generally shows a relatively flat line. There can be movement in the price associated with interest rates. 3. SENIORITY OVER COMMON STOCK. In the event of a bankruptcy, preferred shareholders must be paid before holders of common stock. Plus, in the overwhelming majority of cases, common shareholders cannot receive dividends until after preferred shareholders have been paid. In the case of cumulative preferred stock, shareholders must be paid all dividends, including any that were missed, before common shareholders can get anything. 4. INTEREST RATE SENSITIVITY. As an investment vehicle that pays a fixed amount in dividends, preferred stocks are sensitive to changes in interest rates. When rates go higher, the price has downward pressure and vice versa. 5. RATINGS. Preferred stocks carry ratings from major rating agencies to reflect the creditworthiness of the investment. 6. CALLABLE. The stocks are usually callable five years after issuance, and are callable in perpetuity from that date forward. While offering aspects of both common stock and bonds, this investment vehicle is a hybrid that typically yields more than either one. Further augmenting that high yield is the fact that it pays dividend income taxed at a maximum 15 (or 20) percent rate, versus income that can be taxed at your full personal rate. That s a huge advantage, making an already high yield even higher on a relative basis. In this Special Report, I ve picked three preferred stocks that are especially attractive right now, and that make for a great entry point for those looking to enter the preferred marketplace. I also share two exchange-traded funds (ETFs) that are a bundle of preferred stocks, giving you instant diversification in this category. Please note: the Secret 9-Digit Clearance Code is listed below each pick, it is called the CUSIP number. Pick No. 1: WELLS FARGO & CO., 5.20% PREFERRED STOCK (WFC-PN) CUSIP: These are fixed rate preferred securities issued by San Francisco-based global banking giant Wells Fargo (WFC). The bank is arguably the most fundamentally sound of all the U.S. big banks. Focusing on loans and more basic banking with relatively limited involvement in capital markets enabled Wells Fargo to remain profitable through the financial crisis. The fraudulent account scandal in 2016 dinged the bank s reputation, and penalties hurt it financially in the short term. Yet Wells Fargo s story is still solid, remaining highly profitable with a sound business that will only improve as the economy strengthens. It s also the most well positioned of all big banks to endure another economic downturn. This issue is callable at any time after Sept. 15, 2017, at the par value of $25 per share. WFC-PN trades around $24 per share with a current yield of 5.4 percent, and holders will get a nice premium if it is called. It pays a fixed dividend of $1.30 per share in quarterly payments of $0.325 per share. Payments are considered dividends and thus qualify for the 15 percent or 20 percent maximum tax rate. The issue is also investment grade rated by Moody s and Standard & Poor s. 4 TheHighIncomeFactor.com Special Report

5 Pick No. 2: POWERSHARES PREFERRED PORTFOLIO (PGX) CUSIP: 73936T565 The PowerShares Preferred Portfolio (PGX) is an exchange-traded fund (ETF) that represents a vast portfolio of over 250 different preferred issues. PGX provides broad exposure to the asset class and eliminates the risk associated with any one particular security. It s a great place to start. PGX tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, which tracks the performance of fixed rate U.S. dollardenominated preferred securities issued in the U.S. domestic market. About 80 percent of preferred stocks are issued by financial companies such as banks, insurance companies and brokers. This portfolio is heavily exposed to that industry, representing over 70 percent of current holdings. This overexposure is likely a good thing now because these companies should prosper in the stronger economy. A beautiful aspect of this fund is that it pays dividends every single month. The yield is solid too, currently at almost 6 percent. The yield is backed by a strong portfolio of mostly investment grade rated issues from U.S. companies. Pick No. 3: PUBLIC STORAGE INC., 5.875% CUMULATIVE PREFERRED STOCK (PSA-PA) CUSIP: 77460W792 While the overwhelming majority of preferred stock issues are from financial companies, this one is a different animal. Public Storage (PSA) is a real estate investment trust (REIT) that owns, acquires, and operates selfstorage facilities in 38 states and seven Western European countries. It is the largest publicly traded owner of such properties in the world. Storage may not be sexy but it is a good practical business with a reliable cash flow. Because of Public Storage s size, it enjoys scale advantages over the competition and is currently benefiting from a limited supply of such properties. The common shares have provided positive returns in eight of the last 10 years. This issue is callable at any time after Dec. 2, 2019, at $25, and its maturity is perpetual. The issue pays $ per year in quarterly installments and, at the current price of $26.11, yields a stellar 5.6 percent. Shares are cumulative, meaning any missed dividends have to be made up, but they are taxable at the regular income tax rates. The issue also carries strong investment grade ratings of A3 by Moody s and BBB+ from S&P. Pick No. 4: U.S. BANCORP, 5.15% PREFERRED STOCK (USB-PO) CUSIP: Minnesota-based U.S. Bancorp (USB) is the fifth largest commercial bank in the U.S., operating in 25 states. This bank is second to none in terms of sound management and profitability. Its well diversified underwriting practices and sound loans have enabled the bank to steer free of significant losses. It actually remained profitable through the financial crisis. The bank s fee-based business from credit cards, wealth management, and payments processing account for about half of total revenues. This reliable income stream insulates the bank from economic downturns. As well, USB stands to increase profitability in a stronger economy. The shares are callable any time after July 15, 2018 at $25. However, the securities could be subject to an earlier call as changing regulations no longer allow the issue to qualify under tier 1 capital. The issue is selling slightly over $25 per share and yields 5.12 percent. Quarterly dividends qualify for the maximum 15 or 20 percent tax. Pick No. 5: POWERSHARES VARIABLE RATE PREFERRED ETF (VRP) CUSIP: 73937B597 Preferred stocks offer diversification from stocks and bonds, high yields, and often tax advantages. But there is a vulnerability to rising rates. Typically the price of preferred stock falls as interest rates continue to rise. But this fund has an answer to that problem. VRP invests in variable or floating rate 5 TheHighIncomeFactor.com Special Report

6 preferred stocks that pay dividends that can rise along with interest rates. The fund tracks the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index. In the fund, 90 percent of securities track the index. The fund invests in a portfolio of about 100 securities with average duration of less than four years. Most of the current portfolio is in investmentgrade rated securities. It is designed to provide lower risk and lower yield than a regular preferred stock fund. But the fund is currently yielding a solid 5 percent. VRP also provides excellent diversification and pays dividends every month. The Preferred Way to Go As I explained earlier, the preferred stock sector offers balance and diversification that used to be the domain of bonds, but no more as the bull market in that asset class comes to an end. And the adjustable rate takes care of the interest rate risk. You can diversify and get a dependable fixed rate of income outside the stock market without taking on the risks the current bond market presents. The best part? Preferred shares aren t some secret out-of-the-way investment only available to the rich and well connected. Anyone with a brokerage account can buy preferred stock. In fact, it s as easy as buying a share of Apple (AAPL) or Coca- Cola (KO). Just log on to your brokerage account and enter the ticker symbol or CUSIP number listed above to find the preferred stock you want to buy, then decide how many shares or how much money you want to allocate to the trade. That s it just like that, you ll have your own guaranteed income certificates in your portfolio, generating income no matter what happens next in the stock market. Want to Know More? For more information on preferred stocks, check out and Both provide information on preferred shares and a way to search and get current quotes for all available preferred stocks on the market. Note that you ll have to register with Quantum Online to use some of their tools registration is free. Editor s Note: This report on preferred shares carries no endorsement, implied or otherwise, from Warren Buffett. Cover Photo: Carlo Allegri/REUTERS To renew or subscribe to The High Income Factor go to: or call The High Income Factor is a monthly publication of Newsmax Media, Inc., and Newsmax.com. It is published at a charge of $ for print delivery ($99.95 for digital/online version) per year through Newsmax.com and NewsmaxFinance.com. The owner, publisher, and editor are not responsible for errors and omissions. Rights to reproduction and distribution of this newsletter are reserved. Any unauthorized reproduction or distribution of information contained herein, including storage in retrieval systems or posting on the Internet, is expressly forbidden without the consent of Newsmax Media, Inc. For rights and permissions, contact the publisher at P.O. Box 20989, West Palm Beach, Florida Financial Publisher CHRISTIAN HILL Senior Financial Editor TOM HUTCHINSON Editor MICHAEL BERG Art/Production Director PHIL ARON To contact The High Income Factor, to change , subscription terms, or any other customer service related issue, customerservice@newsmax.com, or call us at (888) Newsmax Media, Inc. All rights reserved. Newsmax and The High Income Factor are registered trademarks of Newsmax Media, Inc. DISCLAIMER: This publication is intended solely for informational purposes and as a source of data and other information for you to evaluate in making investment decisions. We suggest that you consult with your financial adviser or other financial professional before making any investment. The information in this publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. Information is obtained from public sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this letter be construed as an express or implied promise, guarantee or implication by or from The High Income Factor, or any of its officers, directors, employees, affiliates, or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Some recommended trades may (and probably will) involve commodities, securities, or other instruments held by our officers, affiliates, editors, writers, or employees, and investment decisions by such persons may be inconsistent with or even contradictory to the discussion or recommendation in The High Income Factor. Past results are no indication of future performance. All investments are subject to risk, including the possibility of the complete loss of any money invested. You should consider such risks prior to making any investment decisions. See our Disclaimer, as well as a list of stocks that the Senior Financial Editor owns by going to highincomefactor.com. 6 TheHighIncomeFactor.com Special Report

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