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Dear Mr. Berko:

For reasons I do not want to disclose, I need to generate 8 percent interest on $120,000 to earn $9,600 a year. The investment vehicle must be rated bank “investment quality” or triple-B or better. I need to distribute $2,400 quarterly to a second party who will be responsible for the taxes on this money. My obligation is for five years, and then I get my $120,000 back. Hopefully, the recommendations you make will be worth at least $120,000 in 2013 when my obligation ends. This income must be as assured as possible, because if it doesn’t earn at least $2,400 a month, the shortage will come out of my principal.

W.O., Louisville, Ky.

Dear W.O.:

I think you’ll have to consider something called a preferred stock. Most preferred stocks behave like bonds, but in case of bankruptcy they stand in line only in front of common stock holders. They pay a fixed dividend, and the value of the preferred depends upon its interest rate and the credit quality of the issuing company rather than the company’s growth potential.

Some folks call preferred stocks “the worst of both worlds” because the capital gains potential is limited and the dividends never increase. The yields you need to produce an 8 percent return with triple-B or better preferreds are only to be found in financial issues or bank stocks. Those issues have been deservedly beaten, bloodied and stomped on.

But there’s no doubt in my mind that the issues below will survive and in a few years the “sturm und drang” will be just an ugly memory of Wall Street’s unchecked cupidity. The issues mentioned below are bedrock of our financial system, and their failure is just not an option.

Today might be one of the best times to buy preferred issues, because greed, aggressive risks and self-adulation by the creeps at Merrill Lynch, Citicorp, et al., plus a viciously tight credit market, have exploded the rates on quality preferred issues. Yep, it’s possible to earn unusually high yields on bank quality preferred issues. As credit markets improve over the next few years, I think some of the following preferred issues could increase in value.

Fifth Third Bancorp is a diversified financial services company with 1,100 full-service bank centers in the Midwest and over $100 billion in assets. Its Fifth Third, 7.25 percent Preferred (FTB-A-$16.20) pays a $1.81 dividend yielding 10.9 percent. FTB-A has an A-minus rating by Standard and Poor’s and is callable at $25 in May 2012. The common has recently been upgraded to “outperform”, and earnings for 2008 and 2009 are projected at $1.92 and $2.25 respectively.

Merrill Lynch 8.625 percent Preferred (MER-Q/$23.71) pays a $2.15 dividend yielding 9.1 percent. Merrill’s preferred issue is rated A-minus by S&P and is callable next May at $25. Merrill, the largest brokerage in the world, got caught with its pants down and had to borrow billions to cover huge losses on derivatives, collateralized debt obligations and mortgages. Merrill will be lucky to make a dime this year, but the Street expects earnings of more than $4 in 2009 and has three “buy” recommendations on the stock.

Bank of America 8.20 percent (BAC-H-$24.79) Preferred is rated a solid A-plus by S&P, yields a swell 8.3 percent and is callable in May 2013. Bank of America is one of the largest banks in the world with 5,700 offices and 57 million customers. Merrill Lynch gives Bank of America five stars, and the Street reckons earnings of $2.70 and $3.89 are on track for 2008 and 2009.

Fannie Mae 8.25 percent Preferred (FNM-T/$23.55) pays a dividend of $2.06, yields 8.75 percent, is callable in May 2013 and is rated AA-minus by S&P. Fannie Mae is the largest non-bank financial company in the world and the nation’s largest source for financing home mortgages. Several brokerages recently upgraded FNM, which is expected to lose $2.30 this year but earn $1.90 in 2009. The preferred is callable in May 2013 at $25.

Barclays Bank 8.125 percent Preferred (BCS-D/$24.53) pays a $2.03 dividend yielding 8.4 percent. This issue is rated A-plus by S&P and is callable in 2013. Barclay’s is one of the largest banks in the United Kingdom and has been in business for more than 300 years. Earnings are expected to come in at $3.78 this year and $4.15 in 2009. The Street ranks BCS as “peer perform.”

And finally, Citigroup 8.5 percent Preferred (C-M/$23.45) pays a $2.12 dividend that yields 9 percent, is rated A by S&P and is callable at $25 in 2013. This is probably the largest bank in the world, doing business in more than 100 countries with more than 200 million customers. The stock should earn 44 cents this year, $2.76 in 2009 and three Wall Street firms have a “buy” signal on this issue.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © Copley News Service