Taking Some Profits!

There’s a lot of “Fed Cut! Do This!” content on social media. I don’t think it's necessary to make radical changes every time the Fed adjusts rates.

This month, I’m taking profits on a couple of funds and redeploying to higher yield, or (potentially) higher performance. The portfolio yield is currently 10.81%.

Rate Cuts: Are you Selling BDC’s and CLO’s?

The short answer is no, or not yet.

The longer answer is that I’m in no rush to make dramatic changes because 1/ The market prices expected changes like this into the relevant stocks/funds and 2/ A 0.25% cut barely moves the needle. A year ago, the Fed made a series of cuts totaling 1.00% and floating rate assets like CLO’s, BDC’s, loan portfolios, and floating rate preferred shares did not crash. The prices were largely unaffected. 

Here’s a CLO example, CLOZ:

However, the rates cuts did reduce the distributions for CLOZ:

In round numbers, the CLOZ yield fell from approx 9% to 8%. That’s nothing to celebrate, but it has to be taken in the context of all other income investments. Fed rate cuts also reduced the yield on money market funds, short term treasuries, etc. So 8% sounds like a downgrade, but relative to “risk free” alternatives, the “risk premium” remained constant.

As a reminder, this was for a 1.00% reduction in the Fed Funds rate. We don’t know if, or when, rate cuts of that scale will occur in the near term.

What about fixed income investments?

Lower interest rates WILL have an effect on the price of fixed rate investments (eg. corporate bonds, and fixed rate preferred shares, not withstanding call risk). Everything else being equal, the price of fixed rate investments goes up, when interest rates go down.

If you’re worried about severe interest rate cuts, you could speculate on fixed rate investments, as their distributions will remain constant in dollar terms, and their price is likely to increase if rates fall.

For example, the new fixed rate preferred stock, NLY.PR.J from Annaly Capital (a mortgage REIT), pays 8.875% fixed (as calculated on a $25 par value). There’s no call risk for 5 years (“call risk” means the issuer can force you to sell at the $25 par value). The lower the Fed Funds rate goes, the more desirable that 8.875% of $25 will become. In other words, rate cuts would push the price higher than $25.

NLY.PR.J Terms & Conditions:

https://www.quantumonline.com/search.cfm?tickersymbol=NLY-J&sopt=symbol 

I continue to hold the sister preferred stock, NLY.PR.F. It’s a variable distribution and the yield is higher at 9.33%. Switching to the certainty of NLY.PR.J means immediately forgoing some income. I’m in no rush, but it's worth keeping an eye on these things.

Trades

I used to scroll through Schwab, Etrade, and Interactive Brokers portfolio screens, and then try to figure out who was going to pay me what, and when. Much easier to have 1 clean dashboard that’s designed for income investors.

I usually sort by yield and price, to get a quick overview of how the market is affecting my portfolio. Occasionally they have sales, and the current one ends September 24th.

Existing customers can ALSO take advantage of this promotion! If you already have Snowball, you can extend an existing subscription early; just click "Unsubscribe" and Subscribe again at the Autumn Sale rate. (maximum subscription period is 720 days)

Click here for the discount.

Recent Videos

(Published Since the Last Edition of Armchair Insider)

Armchair Insider Portfolio

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Basic Resources

• Dividend Tracker: Snowball

• Primary Research Tool: Seeking Alpha

• How I Use Seeking Alpha to Find Income Stocks/Funds: Video Tutorial

• Closed End Fund Database: CEF Connect

Advanced Resources

• How to Buy Preferred Shares: 67 Page Guide to Preferred Shares

• Preferred Stock Profiles (Rates, Call Dates, etc): Quantum

• BDC Weekly Insights Report: Raymond James

• BDC, Preferred Stock, & Bond News, Portfolios, and Trades: Systematic Income Investing

Thanks for stopping by…see you in the next issue!

Regards,