BERKO: Which stocks to trade for CDs?
Friday, June 29, 2012 7:00 AM
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Dear Mr. Berko:
I have a $30,000 4.25 percent CD that comes due this week, and l want to invest half of that in a couple of safe stocks that will pay me at least 7 percent and a give me some good opportunity for long-term growth. I hope the stock market will continue to go up. Could you please get back to me real quick? I’m going to renew $15,000 of this CD and I don’t want the other $15,000 doing nothing for too long. Thank you in advance for your help.
Because you’re not asking for the impossible but only the very nearly impossible, I should be able to help you, but it’s becoming more difficult every day. As rates remain low, retirees who usually put their funds in savings or CDs are now chasing higher returns in the equity market. And as growing numbers of investors compete for a limited number of dividend shares, those share prices will continue increasing. And so might the market as the administration demands that the Fed keep rates low, compelling more retirees to reach for higher-yielding equities. It kind of reminds me of the “greater fool theory” – as soon as rates begin to rise, stock prices may begin falling like acorns from tall oak trees. So investors need to be extra careful when substituting equities for their CDs.
Consider the Bank of America 7.25 percent Non-cumulative Convertible Preferred Stock Series L (BAC-L) trading at $971 per thousand face value and callable by the bank at $1,000 on Jan. 30, 2013. Rated Ba3 and convertible into two shares of common, this convertible preferred yields a dandy 7.5 percent. If BAC calls BAC-L this January at $1,000, you will have a $29 gain in the preferred price plus two $18.25 dividend payments, or $36.50 (total gain of $65.50), which is a 13.5 percent annualized return. But I doubt BAC will recall BAC-L, because it needs the capital to give CEO Brian Moynihan a stellar performance package and pay other executives 8 to 12 percent salary increases this year and next.
So you should be able to hold BAC-L for four or five years, earning a sweet, comfortable 7.5 percent from a bank that has proved itself too big to fail. And if by some miracle the value of BAC shares rises above the $50 level (which is a plausible extension of reality), BAC-L could rise well above $1,000 in the coming few years. However, I suspect that BAC will redeem this preferred as soon as it’s able to off-load Merrill Lynch, which has been the proverbial monkey on its back and the source of continuing and innumerable lawsuits. Still, this issue is as safe as a CD ... because if BAC is allowed to fail, then the entire banking system will fail too, and all bank CDs will be worth bupkis.
Buy some Total – not the cereal, but rather the fifth-largest publicly traded international oil company on the planet – which pays a generous $2.61 dividend, yielding 6 percent. Total SA (TOT-$43.86), based in Paris, is a $235 billion revenue integrated oil company with 97,102 employees and operations in more than 130 countries. Total is also a major player in the specialty chemical business and has significant interests in coal mining, power generation and next-generation energy activities such as solar, biomass and nuclear.
Earnings for 2012 are expected to come in at $6.80 per share, so the Street expects a strong bump in the dividend to $3 this year. Then in 2013, on an expected $245 billion in revenues and per-share earnings of $7.50, the Street thinks TOT’s dividend could jump to $3.25, which is an 7.4 percent yield at today’s price.
TOT has strong finances, an excellent balance sheet and superb operating margins. The only problem is TOT’s French parentage. Everyone in Paris speaks French, a funny language that seems to have a different word for everything.
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