Dear Mr. Berko: I have exactly $33,651.27 to invest for income and I'm torn between buying a 5.5 percent or 6.0 percent Triple-A corporate bond or buying several low-rated junk bonds with 10 percent to 12 percent yields. Please tell me what you think interest rates will be a year from now. I know if I buy Triple-A Bonds at 5.5 percent and rates rise that their values will fall — and that really concerns me — or I could buy a five-year CD paying 4 percent without risk to principal. And I know that I can tolerate high risk because this money represents a settlement that I will get every year for 10 years. I don't need this money, but it would be wonderful if I could invest it and get a good income. — W.L., Port Charlotte, N.C.
Dear W.L.: According to my math, I've concluded there's a 71 percent degree of probability that interest rates will begin to rise before the first quarter of next year. And there's almost a 100 percent certainty that interest rates will rise — and by more than a little bit — by the end of 2010. Some respected analysts think that rates on long-term treasuries could rise to 7 percent or possibly 9 percent by 2011 or 2012. And frankly, considering this country's huge deficit (over $2 trillion for 2009) and its enormous national debt (over $12 trillion this fiscal year) the supply of U.S. debt significantly exceeds galactic demand. China is seriously concerned about the market value of the trillions of dollars of our bonds it owns, and Japan has voiced very strong concern. And right now, higher interest rates seem to be the only solution to protect China and Japan against the very real possibility of a decline in U.S. bond values. So in my opinion and in the opinions of knowledgeable analysts, I'd certainly stay away from Triple-A long-term corporate bonds and a low-yielding 4 percent, five-year CD. Now because you are comfortable with risk, the following very risky issue could make a big difference in your income and mitigate the principal risk in your portfolio.
Quest Communications (Q-$3.73), home ported in Denver (once part of that marvelous AT&T empire) is a $12.5 billion revenue telecommunications company.
Q provides local, long-distance wireless and data services within its 14-state service area. Q also provides long-distance services outside its service area, as well as broadband, voice and data communications. Q has been profitable since 2006 and last year, the board initiated a 32-cent dividend that offers a 9 percent current return. However, I'm not enthusiastic about the common stock because I see barely perceptive growth, nearly zero earnings growth and timid principal growth. I do, though, anticipate a healthy and growing free cash flow. Management has significantly improved its promotional and marketing efforts to grow its business. And management has smartly tightened cost controls, reduced head count and greatly improved facilities management efficiency. So I expect a continued, steady-eddy, level revenue stream via Q's new Wi-Fi access for high-speed Internet customers, and an expanded FTTN network that will broaden video content offerings. Frankly, I don't think the stock has any upside beyond $5 or $6 unless there's a merger or buyout in the wings. But I would definitely invest half of that $33,651.27 in the ML depositor preferred trust 8 percent Quest Capital certificates (PJA-$15.05) with a 13 percent yield and invest the remaining half in Triple-A corporate bonds. PJA's par value is $25; it's rated B-plus; the dividend is $2; it's callable at $25 and it matures in February 2031. If interest rates rise, the value of this junk preferred will be cushioned by its current high return. And if rates remain low, I believe other investors who seek higher yields will be attracted to this issue. So purchase 1,000 shares and enjoy what I believe is a sound high yield. Meanwhile, take a peek at Sprint Preferred (PYG), Alcatel Lucent Convertible (LUTHP) and the Ford Convertible (F-S) that were discussed in recent columns, all yielding 11 percent or better.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2009 CREATORS.COM
