Darwin's Finance » High Yield

Check Out These Interesting Financial Products and Deals

Darwin — Fri, 05 Mar 2010 12:44:08 +0000

There are some neat new sites, services and deals out there that can either boost your bottom line with minimal effort or flat out provide entertainment value with no discernible benefit. Here are a few in no particular order:

Blippy – Blippy is perhaps one of the strangest new services I’ve seen this year. I have yet to figure out what the actual value or utility is to society, but I’ve gotta admit, it’s an interesting concept and rather amusing to watch. Frankly, I’m not sure if I’m more amused by the content of the site or the fact that multiple legitimate venture capital firms are backing this garage experiment. Basically, you create a profile and publicize for the world to see every purchase you make. On one hand, this sort of voyeurism is sure to be a hit for the same population that loves reality TV and blogs that share relatively insipid yet personal details about the author that for some reason draw massive readership. Conversely, from the participant’s point of view, perhaps it’s either narcissism or a last-ditch attempt to force some sort of fiscal restraint by just putting it all out there for all to see. For instance, many studies have shown that people are more likely to lose weight if they face public shame or embarrassment by not meeting their objective once their journey is tracked by a viewing public. i.e. The Biggest Loser, someone posting a before/after body shot on their blog, etc.

Whatever the outcome of this venture, it’s worth at least looking at once to just ask, “Why?”

6-Figure Salaries – If you’re making $75,000 or more and want to at least keep tabs on what your market value is outside your current role, The Ladders is such a cool site. I signed up a while back and I get automated emails based on my preferences for region, the field I’m in, positions I’d consider, etc. I get an update weekly or so with Director of this, Project Manager of that, salaries list, locations, etc. It’s pretty neat – and it’s FREE to sign up and get the initial updates. Since so many job postings out there aren’t aligned with your actual interests or they have lousy salaries, The Ladders is great at screening just what you’re interested in (or finding out what your boss makes!).

A CD You Control? – There’s a pretty interesting new product from Ally Bank that I’ve never seen before. The Rising Rate CD is a certificate of deposit that allows you to actually increase the rate once during the term in case rates rise on the same term CD and you feel you’re missing out. Feel like a sucker locking in a low rate today so it’s just sitting in an even lower yielding savings account indefinitely? This may be the solution. If rates spike as the Fed reacts to inflationary forces, you can jump your rate up at will. Check out the Rising Rate CD details.

No Penalty CD – Ally Bank also has a No Penalty CD that combines a competitive rate with the ability to break the CD and withdraw funds without the downside of a CD penalty. More info on the No Penalty CD.

$100 Signup Bonus – at OptionsXpress. This is a top options trading outfit that of course, allows you to trade stocks as well. Given the $100 signup bonus, even if you already have an online broker you like using, it’s worth setting up this extra account for a free $100. You only need $500 to open the account so it’s a 20% ROI right off!

0% Down Mortgage? In 2010? You’re not seeing things. Under an obscure US government program that isn’t widely publicized, thousands of American families are still getting mortgages with NO money down. It’s called the USDA Farm Loan but most of the people partaking live on anything but a farm.

Highest Saving Account Rates OnLine

Darwin — Fri, 19 Feb 2010 03:27:02 +0000

As of February 18, 2010, these are the highest savings account rates that can be easily achieved online without geographical restrictions, credit union restrictions, military service requirements, etc. While these interest rates may seem somewhat anemic, they are actually among the highest in the country given a 0% Fed Funds rate and the cost structure benefits of online banking over conventional brick and mortar outfits. The nice thing is that the interest rates on these larger established banks have been relatively steady compared to some other bait and switch banks I’ve seen that offer rates significantly higher than the market rate, then precipitously cut the rate once you’re there. All of these savings accounts are FDIC insured up to $250,000.

EverBank 1.51%

Ally Bank 1.30%

WTDirect Savings Account 1.26%

ING – The Orange Savings Account 1.15%

Business Development Companies – Excellent Overlooked Investment Strategy

Darwin — Thu, 14 Jan 2010 15:56:17 +0000

A Business Development Company (BDC) is a niche investment category that even many high yield investors don’t have much familiarity with. While the large banks, energy trusts and real estate investment trusts (REITs) are widely known for their high yields, the Business Development Company opportunity goes widely unnoticed. Not familiar with BDCs? Well, think of a Business Development firm as a lender (and sometimes, investor) of last resort to struggling companies starved for cash or even fledgling companies with high potential willing to cede a stake, control or above-market interest rates in exchange for a cash infusion.

BDCs will generally lend to smaller companies and startups at very high interest rates (think corporate payday lenders…but with more class) and often take equity stakes in these companies as well. In a nutshell, these firms have vast experience in going into a struggling firm, assessing its prospects, making changes if necessary (since they’re holding the cash) and ensuring a favorable return for shareholders and principals in the company. They are much better at this than individual retail investors. They have the access and experience that retail investors don’t. They are also diversified. While some Business Development firms may focus on a particular sector, like say, Tech firms or energy exploration firms, etc., they hold stakes in several companies at once, smoothing out risk – because defaults do occur, especially in these smaller start-ups.

Business Development Strategy for Investment

Investors seeking to build a high yield portfolio, perhaps in a tax-advantaged self-directed IRA, may want to consider making room for 1-2 BDCs in their mix. By their very nature, BDCs are optimal income generators. As mandated by the Investment Act of 1940, BDCs must distribute a minimum of 90% of their taxable earnings quarterly to maintain their one-level tax paying status. In reality, many firms actually pay out virtually all taxable income and short term capital gains, as well as long term capital gains from the sale of equity interests in the companies in which they established positions. There are even some monthly payers as well. Based on current dividend yields and price levels, many Business Development Companies are currently yielding 8-11%. Given the crummy low interest rate environment, this is certainly appealing.

More Stable and Predictable Dividend Payouts

During the economic collapse of 2009-2009, while many large Financials were forced to cut their dividends to abide by TARP requirements and smaller Financials acted similarly in order to preserve cash and meet leverage requirements, BDCs hold a bulk of their assets in debt securities of their portfolio companies. As long as their entire portfolio of companies doesn’t go belly up at the same time, that dividend payout continues in some form. The difference between a BDC portfolio and say, a high yield corporate bond ETF is that the ETF is passive and based on an index, whereas a BDC has insight into and influence over their portfolio companies. This, in turn, translates into better performance over time.

BDC Investment Risk

While BDCs are prone to volatility and even collapse like other common stocks (ACAS was a former high flier that tumbled to earth – I had owned it and warned about an exceedingly high dividend ratio and sold myself before it experienced a complete collapse – but I took my lumps on the way down), they are generally less prone to do so than what we just saw on Wall Street. By law, BDCs cannot leverage up the same way Wall Street firms did since total debt cannot exceed total equity. Thus, 1:1 leverage is much more manageable risk than the 35:1 we saw with Bear Stearns prior to its demise.

Business Development Company Stocks

In the interest of disclosure, I’ve been long Firth Street Corp (FSC) for some time now in my self-directed high yield IRA. FSC just announced an 11% Dividend Increase and shares have outperformed of late, including a gain of 3% Thursday in a flat market for Financials. Based on this week’s dividend hike, common shares will now yield over 10% which puts it in the same league as
high yield corporate bonds, but with different risk and performance characteristics. While municipal bond ETFs can deliver tax free yields in the 4-6% range, which translates into a 6-9% tax-adjusted yield for high-tax bracket investors, they don’t offer the same potential for continued capital appreciation, not to mention, municipalities are actually facing a decent risk of default in many areas (California anyone?). In addition to the dividend hike announcement, FSC announced that its wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (the “SBIC Subsidiary”), has received committee approval for a license from the United States Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”). This is government funding to further their investment ambitions at favorable terms.

There’s also a Preferred Stock ETF yielding over 8% which has high yield alternative investment characteristics as well.

Additional Business Development Company Stocks (with % Yield) include:

GLAD – 10.7% – Gladstone Capital Corporation
BKCC – 14.6% – BlackRock Kelso Capital Corpora
NGPC – 7.7% – NGP Capital Resources Company
PSEC – 12.9% – Prospect Capital Corporation

* These yields are based on recent quarters and upcoming payouts, but since the payouts are based on quarterly income, they often vary by quarter. The best measure may be a review of historical payouts and recent share price moves to see if the market is pricing in a downturn compared to their peers.

Surprisingly, I’ve yet to come across a BDC ETF, but I’m sure there’s one in the works somewhere. At this rate, we’re going to have more ETFs than we do stock tickers (see this ETF List with over 800 issues going strong), so I’m sure someone’s working on it. In the meantime, do your own research, watch out for red flags, don’t blindly just chase yield (since you often get what you pay for like these 11% Investment Notes) and maintain an appropriate asset allocation.

For other dividend and income ideas, check out Darwin’s other High Yield articles.

Advanta 11% Yield Investment Notes – Going, Going, Gone!

Darwin — Wed, 25 Nov 2009 13:50:58 +0000

Advanta had been plastering their ads for high yield investment notes paying as high as 11% throughout my local paper and elsewhere for the past several months and I’d decided to investigate a bit further. Given the low interest rate environment we’re in and my presumption that any company offering such a premium over market rates must be in severe distress, I wasn’t surprised to find concerns with their financial solvency both upon my own independent analysis and via analyst statements. Not once, but three times over the past several months, I highlighted the risks associated with purchasing these investment notes given the complete disconnection from reality with regard to risk vs. reward:

Declining Share Price – sub $1
Long Term Lock-in period paired with VERY heavy advertising
Obvious solvency risk
Paying Well Above Market Rate
Not FDIC Insured

How’s an 11% Gain on a 100% Loss Sound?

The Warnings were There:

April 8, 2009 – Advanta High Yield Notes: 8.5% Ã¢â‚¬â€œ 11% Yield Worth the Risk?

May 13, 2009 – Advanta Freezes Credit Cards Ã¢â‚¬â€œ High Yield Notes in Jeopardy?

June 18, 2009 – Structured Notes: Products Deliver Guaranteed Returns in any Market

Bankruptcy

Well, earlier this month, Advanta filed for Chapter 11 Bankruptcy. While it’s not clear whether investors in these high priced, high yielding, highly restricted investment notes will ever see their money back, what is clear is that the warning signs were there and the company’s practices of heavily advertising these instruments seems questionable to put it nicely. With a front page Google Search ranking for “Advanta Investment Notes”, I’d like to think that at least a few people were spared the significant losses, heartache and hassle associated with the bankruptcy filing, but surely, since their advertising was so robust, many people are now going to be looking for their share from the proceedings.

Lessons Learned?

If it’s too good to be true, it probably is. While this is the exact opposite of what I said about a niche government program offering 0% down loans and good terms under the USDA Rural Loan Program, I can’t think of any other instances where there’s a distinct difference from the general market that doesn’t have a catch.

If It’s High Yield You Seek…

Check out some of these resources which offer similarly high yields, but alas, are not without risk:

Review: Flex CD Offers High Yield if the Dollar Tanks Against BRIC Currencies

Darwin — Sun, 22 Nov 2009 03:30:29 +0000

The Flex CD (MarketSafe BRIC) offered by Everbank is a unique financial innovation for this low interest rate environment with an ever weakening US Dollar in terms of foreign currencies. Everbank offers a flex CD they refer to as the BRIC MarketSafe CD. Basically, if the US Dollar strengthens against the currencies of the BRIC (Brazil, Russia, India, China) economies, then you are guaranteed to have your principal protected over the term, so you can’t lose money. However, if these currencies continue to rally against the dollar, which has been the trend of late, the flex CD can appreciate in value significantly. If it’s any consolation, as evidenced by this graph of the US Dollar Bear index, the greenback has declined 17% since the March lows when the world believed we were on the brink of disaster and investors fled to safety in the dollar. However, as it became evident that foreign economies were more likely to strengthen coming out of the crisis, the shift out of the dollar has been swift and momentous. Imagine a 17%+ return on a CD?

MarketSafe BRIC Flex CD Basics:

3 Year CD Term
$1,500 Minimum Deposit
FDIC Insured
Principal Protected
CD Returns based on 1/4 each of Brazil, Russia, India, China currency parity with USD

Based on the EverBank Term Sheet (pdf here), the following hypothetical calculation was provided (completely feasible given the current economic malaise in the US, especially with trillions in debt moving in the wrong direction):

Payoff Example:
Upon maturity, the USD has weakened 10% against BRL, 15% against RUB, 5% against INR and 1% against CNY.
The payout would be as follows:
= Max [ 0, (1/4) * (BRL performance) + (1/4) * (RUB performance) + (1/4) * (INR performance) + (1/4) * (CNY performance) ]
Or calculated as:
= Max [ 0, (.25) * (.10) + (.25) * (.15) + (.25) * (.05) + (.25) * (.01) ] = 7.75%

While 7.75% may not sound enormous (and remember, this is hypothetical and Everbank would be remiss to provide outlandish claims), it is higher than any other standard 3 year CDs out there and in the event of a dollar collapse or even continued weakness, which will over time decrease the standard of living in America, the return could be quite significant.

What better way to combine principal protected FDIC insured funds with currency risk management?

Check out this MarketSafe BRIC CD at EverBank:

14 High Yield Large Caps with Steady Dividends

Darwin — Fri, 07 Aug 2009 03:04:37 +0000

In an effort to highlight the dearth of available blue chip organizations with high market capitalization providing investors with a high yield dividend payout as a result of the recent market downturn, I’ve captured the stocks with Market Capitalization of over $25 Billion that yield at least 5%. This data is current as of 8/6/09. The following table is sorted by highest yield stocks first.

Note that in today’s low interest rate environment, beating 2.5% on a CD/Savings Account (see Ally Bank Review as they offer the highest yields around) is unlikely and following a recent market rally exceeding 40% from the March lows, capital appreciation is anything but guaranteed as well. A sustained 5% yield held over a long period of time (regardless of share price movement, as long as dividend payout is steady or growing) will virtually guarantee that your portfolio outpaces inflation and may very well exceed the major market indices as well if the market moves sideways or downward from here. This high yield large cap picture used to look different with Financials comprising a larger portion of the best dividend stocks, but with recent TARP requirements and liquidity conservation efforts, most large financial institutions had to cut their dividends substantially (and their market caps have experience “shrinkage”).

High Yield Large Cap Stocks List

Symbol Company Market Cap Div/Yld

FTE          FRANCE TELECOM                    66.19B                   8.00%
VOD         VODAFONE     111.42B                  7.40%
MO            ALTRIA GROUP 36.27B                   7.30%
BP              BP PLC                                            160.91B                  6.50%
T                AT&T INC.                                    151.81B                 6.20%
DT             DEUTSCHE TELECOM 55.16B                   6.00%
TOT          TOTAL S.A.                                   123.43B               5.80%
VZ            VERIZON COMMUN                 88.83B                  5.80%
BMY        BRISTOL-MYERS SQUIBB    43.09B                  5.70%
LLY         LILLY ELI                                        39.87B                  5.60%
DD            DU PONT                                       28.99B                   5.10%
MRK        MERCK                                           62.44B                   5.10%
PUK         PRUDENTIAL     40.33B                   5.00%

If you’re going to be buying high yield stocks to hang on to dividends, you might as well reduce your costs as well. It’s easy to establish a low cost relationship with an online broker. I recommend Zecco given their incredible pricing: Get 10 free stock trades every month with $25,000 balance or 25 trades each month $4.50 otherwise.

Ally Bank’s Yields “Too High” Says Competition…and No-Penalty CDs

Darwin — Thu, 25 Jun 2009 02:36:20 +0000

The head of the American Banker’s Association complained in this letter to Sheila Bair, Chairman of the FDIC, that Ally Bank’s CD rates and savings rates were too high. They find it to be “egregious” that this former GMAC bank is offering such tantalizing rates given the government stake in GM. While the trade group (of which Ally is not a part of) feels that these “high” deposit rates are anti-competitive and they’re crying foul, in my opinion, since these are FDIC-insured instruments, for individual investors in the market for a CD, now’s the time to get while the gettin’s good!

Why not take advantage of these highest rates around now before they’re potentially forced to comply with a mandate from the FDIC to lower their rates? They actually have some pretty neat products, including a no-penalty CD.

Ally Bank Is…

Ally Bank is from the old GMAC. They’ve rebranded given the obvious connotation with GM these days, even though they are really the old GMAC which wasn’t directly affiliated with GM any more, but I digress…as I’ve posted before, it’s great to buy CDs from distressed institutions since they’re still offering FDIC insured instruments, yet they are desperate enough that they offer above market average rates for savings and CD accounts.

No-Penalty CD

This is a pretty neat product I haven’t seen around much. And with the current rate being higher than just about any regular CD and with FDIC insurance to back it up, I figure this is a great option for anyone in the market for a CD these days.

As you can see below, the savings and money market accounts are among the highest in the nations as well.

*rates removed since not current; click through below for most recent

Since the rates may have changed since publication, visit the Ally Bank homepage to get a full listing of current rates.