How to Earn Higher Dividends Without Leaving the NYSE

For those in the know, there’s a better way to make the NYSE pay.

The average dividend for the S&P 500 stock index is now running at around 1.5 percent, reaching this lofty level with 70 out of the 500 actually increasing their dividends so far this year.

There’s been a lot of fanfare over dividends, as more and more folks are struggling to make their investment accounts pay for their retirements – while others are approaching what they thought was retirement age, only to find out that with yields at such a low level, they can’t afford to just yet.

Meanwhile, there are plenty of companies in the S&P 500 with lots of cash on their books that just refuse to pay a decent cut of their profits to their owners – the stockholders.

And even though 70 companies have increased their dividends, 1.5 percent isn’t what I call a decent payday for investors.

Why do so few big companies pay decent dividends? One reason is that rather than paying stockholders their fair cut of the profits, many management teams are deciding to buy back stock to bolster their own bonus calculations.

This leaves far too many investors facing the prospect of trying to make retirement work with dividends under 2 percent while also taking the risk of the stock market’s heavy volatility – currently running around 15 percent over the past 90 days.

I’ve got a better idea – to invest with a whole lot less volatility while getting paid to own stocks that pay 6, 7, 8 or even double-digit yields – and you don’t even have to leave the New York Stock Exchange (NYSE).

A Different Kind Of Stock

My stocks are a bit different and don’t get a whole lot of play from the talking heads on CNBC or the financial press.

Because while my stocks trade just like their regular peers on the NYSE and even Nasdaq now and then – they’re really bonds that were built and put on the market to make it easier for smart investors to get paid ample yields without the fuss and expense of the traditional opaque bond market.

I call them minibonds.

Minibonds look just like stocks and trade like stocks – mostly on the New York Stock Exchange. But they are actually bonds; not that most folks, including your broker, really ever notice.

Bonds are supposed to be for the big guys. You know – the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that continues to bring bonds within the reach of individual investors.

These mini-bonds look and trade just like regular stocks. And rather than being priced and traded like traditional bonds – with $1,000 face values traded in lots of tens of thousands or millions – these trade in more manageable quantities, with face values of 25 bucks or less.

Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have rather scary acronyms given by the banks that put them together and brought them to the market. But, behind the forbidding facades are some very investor-friendly securities.

Mini-Bond Basics

I'll start with one variety of minibond called Trust Preferred Securities (TruPS). These have been quietly trading for quite a while, yet haven't been on most investors' radar because they're just not widely touted by anyone.

Behaving more like preferred stocks than bonds, these securities arise from regular everyday companies, such as big utilities, banks and telecoms, which essentially issue them to bank holding companies. The holding companies then package them up as trusts and issue them to investors in the markets just like stocks.

The bank holding companies then use the funds to invest in bonds from the issuing companies. Those bonds typically have intermediate to longer maturities, and the cash flow from the bonds is what pays dividends on the TruPS.

The process creates the advantage for the issuing company of being able to treat the TruPS stock as equity for its balance sheet without having to register the issue with the SEC, while the IRS lets the company treat the dividends as debt, just like regular bonds, that allows it to reduce its tax liabilities.

So the investor benefits from the steady dividends and the advantages and security of owning a bond, and the company gets access to cheaper after-tax capital.

There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINEs (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.

But what makes them all similar is that they're issued in sums typically amounting to 25 dollars, with calls by the issuing company at their issuance price – again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TruPS and then know the yield to the call price as well as the call dates.

The result is that you and I can put together a group of these bonds from a variety of industries that pay us quite well, with yields running for most from 6 percent all the way up to 10 percent, 12 percent or more. And even better, although trading just like stocks on the NYSE, they tend to be very steady in price – even when the stock market is in a tizzy of trouble – mostly because nobody in trading rooms or hedge funds knows about them. And that's perfect for your retirement.

Not in Lockstep with Treasuries

Now, you might ask how much these bonds are affected by the looming problems in the U.S. Treasury markets. The short answer: not much. For just as US Treasuries were getting whacked this past week, bonds from increasing numbers of corporations have actually been trading much better, driving yields down below those of the supposedly super-safe bonds of Uncle Sam.

Thus, while Uncle Sam’s bonds have been sinking, my minibonds not only keep paying, but also plod along or even gain in value because they aren’t obligations of Uncle Sam.

One more thing to note: Because they are brought to the stock market by banks, some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don't get spooked – just look behind some of the names on the stock tables to find the real issuer.

How about some examples of these bonds that trade like stocks?

Let’s first look at a company whose common stock has been relied upon by far too many folks, only to have their hopes and plans shattered by management: General Electric (GE).

This stock has been touted as a dividend payer for a generation – only to be a huge disappointment over the past decade or so. And while management came out last week with an announcement that it is thinking of boosting its dividend, that’s just talk: Its current yield of 10 cents a quarter is barely more than 2 percent.

Now, I have plenty of issues with GE’s management but I seriously doubt that the company won't be able to keep paying its bills. So why hold and hope for a real dividend from GE common stock when you can get paid from a GE minibond right now at triple the rate, without the price risks of the stock market?

General Electric has issued a series of minibonds – including one that trades on the NYSE under the symbol of GEJ. It has a coupon of 6 percent and trades at a discount: currently priced around 24.80 for each minibond, giving you a yield of around 6.1 percent. Not huge – but a whole lot better than the S&P or GE’s common stock.

More importantly, the market risk for GE's minibonds – as measured by price volatility rates – is nearly 6 times less than for the common stock. Now, 6 percent is fine, but I’m showing this example as a first step into the world of NYSE traded minibonds.

There’s a whole lot more out there with a whole lot more yield.

They trade steadily with less volatility than the general market, and keep paying their nice fat yields all without fuss or fanfare. They're ready for investors like you and me who want and need to make the most that they can for their retirements.

Disclosure: No positions