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How to Generate Safe, Yet High Returns on Fixed-Income Securities

How to Generate Safe, Yet High Returns on Fixed-Income Securities
March 15
13:05 2016

In this era of low interest rates, many investors are struggling with ways to generate a high level of income from their investments. That’s especially true for retirees who rely upon investment income to pay their daily living expenses.

With interest payments from investment-grade bonds paying annual yields of less than 2.0% and dividends from stocks of most financially-strong companies paying annual yields of less than 3.5%, many investors are concerned about maintaining their standard of living.

Those concerns are amplified by the fact that the price of medical care, which accounts for a large percentage of household spending for persons over the age of 65, is rising at more than twice the rate of other household goods and services.

Retiree income from social security isn’t helping much, with the Social Security Administration increasing monthly payments to social security beneficiaries by only 1.7% during 2015 and the Administration announcing on October 15 that it will not implement any increases in social security payments during 2016.

Although you could potentially generate a much higher level of income by investing in high-yield corporate bonds – junk bonds – those investments often involve considerable risks, such as the risk of investors not receiving interest and principal payments when they’re due.

Fortunately, a few relatively unknown fixed-income securities that I’ve recommended to my firm’s clients pay considerable yields, but do not include the risks inherent in junk bonds. Those securities include Gabelli Equity Trust Inc. 5.00% Series H Cumulative Preferred Stock (GAB-PH), Welltower Inc. (HCN) and Nuveen S&P 500 Buy-Write Income Fund (BXMX). As of March 2, 2016, those securities were paying annual yields ranging from 4.94% to 8.11%.

Gabelli Equity Trust Inc. Series H Cumulative Preferred Stock (GAB-PH) is issued by The Gabelli Equity Trust Inc., a closed-end management investment company that was founded during May 1986 by legendary investor Mario Gabelli.

Unlike the risks associated with investing in junk bonds, there’s almost a 100% likelihood that persons who invest in GAB-PH will receive the trust’s scheduled dividend payments. That’s due primarily to the following:


  • The Investment Company Act of 1940 requires registered investment companies that issue preferred stock to have an asset coverage ratio of at least 200%. That means that the net assets of The Gabelli Equity Trust must be equal to, at all times, at least twice the value of all of the trust’s outstanding preferred stock.


  • As of June 30, 2015 (the fund’s most-recent semiannual report date), The Gabelli Equity Trust’s outstanding preferred stock, including its Series H Cumulative Preferred Stock, had an asset-coverage of 533% – the value of the trust’s net assets was approximately 4.3 times the value of all of the company’s outstanding preferred stock. Hence, the value of The Gabelli Equity Trust’s holdings, which consist primarily of investments in publicly-traded mid- and large-cap stocks, would need to decline by approximately 77% for the trust to be unable to redeem all of its outstanding preferred stock and to pay all of the cumulative dividends owed to its preferred shareholders.


  • The net asset value of The Gabelli Equity Trust tends to move in-line with the S&P 500 Index.


  • In light of the fact that the S&P 500 Index has never declined by more than 44% during any period in history, including the stock market crash of 1929, there appears to be a very low probability that the value of the trust’s holdings would fall by more than 77. (Note: For the year ended December 31, 2008, when the S&P 500 Total Return Index suffered its worst decline since 1931, The Gabelli Equity Trust was still able to maintain a coverage ratio of 289% for all of its outstanding preferred stock).

Although the factors outlined above indicate that there’s little chance of GAB-PH defaulting on its dividend payments, the stock is susceptible to interest-rate risk, meaning that its price would likely fall sharply in the event that market interest rates were to rise considerably.

Fortunately, the possibility of future interest-rate hikes appears to have already been factored into the price of GAB-PH.

And, with my research indicating that the pace of economic growth in the United States will continue to slow over the next few months, I expect the Fed to maintain interest rates at low levels for at least the remainder of 2016.

Offering a 5.00% annualized yield as of March 2, 2016, an AAA credit rating, and almost no chance of default, Gabelli Equity Trust Inc. 5.00% Series H Cumulative Preferred Stock (GAB-PH) appears to be an excellent investment, especially for investors who are seeking ways to generate a relatively high level of dependable income.

Note: Different exchanges and different securities brokerage firms use different ticker symbols for Gabelli Equity Trust Inc. 5.00% Series H Cumulative Preferred Stock (i.e. GAB-PH, GAB.PH, GAB/PH, etc.). Therefore, you should contact your brokerage firm for the symbol that its uses for that stock.

Another dividend stock that pays a relatively high yield and that appears to have little risk in terms of its stock market performance is Welltower Inc. (HCN).

Previously known as Health Care REIT Inc., Welltower is a real estate investment trust that invests in housing communities for seniors, long-term/post-acute care facilities, medical office buildings, inpatient and outpatient medical centers and life science facilities. Its housing communities include independent living facilities, assisted-living facilities, retirement communities, and Alzheimer’s/dementia facilities.

The company’s holdings consist of approximately 1,325 properties in 46 states, the United Kingdom, and Canada. Welltower has been at the forefront of seniors housing and healthcare real estate since the company was founded during 1970.

As of March 2, 2016, Welltower’s stock was paying a 5.17% annualized yield.

Lastly, Nuveen S&P 500 Buy-Write Income Fund (BXMX) is a closed-end fund that seeks to replicate price movements of a 75%/25% combination of the S&P 500 Index and the NASDAQ-100 Index, respectively, while selling (writing) S&P 500 and NASDAQ call options in the same 75%/25% ratio covering approximately 100% of the value of the fund’s equity holdings. In doing so, the fund is able to generate regular income from the premiums that it receives for writing those options.

When the prices of the securities on which the Fund writes call options rise above pre-determined prices, the Fund is required to sell those securities. In contrast, when the prices of the securities on which the Fund writes options remain near the levels that they were, or when the prices of those securities fall below those levels, the Fund will continue to hold the securities on which it wrote options.

As a result of the option-writing features mentioned above, Covered Call Writing Funds tend to underperform their benchmark indices during bull markets and to outperform those indices during bear markets, as well as during periods when those indices trade in a narrow sideways range.

Regardless of any over- or under-performance and the price direction of the securities held by Covered Call Writing Funds, persons who invest in those funds receive regular income from such investments.

With my research indicating that U.S. stock prices, in general, will move in a narrow sideways pattern over the next few months, with a slightly downward bias, I encourage investors who are seeking to generate regular income from their investments to allocate a portion of their financial market assets to Nuveen S&P 500 Buy-Write Income Fund (BXMX).

As of November 25, BXMX was paying an 8.11% annualized yield.

If you’re interested in learning about other relatively safe income securities that pay high yields, I encourage you to subscribe to my Free Weekly Investment Commentary. Click here and fill in the form on the Home page of my firm’s Internet web site to subscribe now.

Until next time,

David N. Frazier

David N. Frazier is the President and Chief Market Strategist of Frazier & Mayer Research, LLC, an independent investment research firm that offers customized research and analytical services to registered investment advisors, hedge funds and high net-worth individual investors. You can check out his latest insights at: www.investorsmonitorcom.


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