This is certainly an interesting week to construct a portfolio, but that is exactly what I have been doing for a new Portfolio Guru, LLC asset management client. My firm's strategy of income generation and persistent reinvestment is just as necessary as ever with a U.S. market that is trading at elevated multiples vs. historical averages, the election looming and the S&P 500 and 10-year U.S. Treasury yielding 2.10% and 1.76%, respectively.
The need for real returns -- income, not the hopes of ephemeral capital gains -- is still very much on the minds of my clients, and I was fortunate enough to kick things off for a new one this week. In contrast to the yield-free world that seems to pervade global financial markets, I was able to create a portfolio for a client with an average annualized yield of 7.9% (before reinvestment).
Risk is in the eye of the beholder, but the higher-yielding securities in this portfolio all are issued by companies where I've met with senior management, and I have valued these securities at levels much higher than the market has. It's what I do, and the high yield of this portfolio gives us around a 6% head start over the benchmarks before we start. Income investing never goes out of style.Obviously dollar amounts and share counts and such are all proprietary between my client and me, but what follows is an indicative list of the securities I have been buying this week. Owing to space constraints, I'll present the first half of the portfolio today and the second half next week. Figures in parentheses are current yields at Oct. 20 closing prices.
JPMorgan Chase; 6.15% Dep Shares Non-Cumulative Preferred Stock Series BB ( (JPM-H) ; 5.6%): A solid, safe way to play the best-run bank in the U.S., if not the world, in my opinion. Very low risk.
Customers Bancorp; 6.375% Senior Notes due 7/31/2018 ( (CUBS) : 5.9%) A niche bancorp located in southeastern Pennsylvania with a focus on high-net-worth customers and lending to those customers' small businesses. It is also chasing millennials with an online-only offering (BankMobile). I know this management team well and they are very conservative -- not risk takers.
AEGON; 8.00% Non-Cumulative Subordinated Notes due 2/15/2042 ( (AEK) ; 7.4%): Nice coupon on a Dutch insurance company with global reach (No. 1 in U.K. retail market; own Transamerica in the U.S.), a large capital buffer and low leverage.
United States Cellular; 7.25% Senior Notes due 12/1/2063 ( (UZB) ; 6.7%): We have to diversify away from financials if we want a balanced corporate bond portfolio. These U.S. Cellular senior notes feature sold call protection (12/19) and a distant maturity (2063).
E.I. du Pont de Nemours; $3.50 Series Cumulative Preferred Stock ( (DD-A) ; 3.9%). This DuPont preferred issue has been in the market since 1947! Taking a lower yield here for the long-term safety and the protection afforded by DD-A trading below its call price. This adds exposure to a well-run industrial company.