Still a Trusty Investment

When I started writing this column 12 months ago, the S&P 500 Index was about 30 percent lower than it is today (April 22). In retrospect, I could have proposed investing in almost any sector of the market and would have had a successful column. After all, stocks have been going up, up, up over the past year.

Looking back to last May, however, a stock market gain of 30 percent was anything but assured. The unemployment rate was rising toward 10 percent and unemployment claims were still averaging more than 600,000 per week. Retail sales were severely depressed and manufacturing activity in the United States was at a 30-year low. Jumping back into the equity market after such a disastrous 2008 would have seemed rash, to say the least.

On the other hand, playing it safe with money market funds and CDs was no way to recover the losses suffered the year before. In most cases, these “safe” investments were paying less than 1 percent.

So I wrote that first column about a relatively obscure interest-bearing instrument issued by banks and insurance companies called a trust-preferred security. It paid a healthy dividend, with features making it relatively protected and less volatile than common stocks. The big banks had a de facto government guarantee, and I felt there was a good opportunity for share price appreciation. On a risk-reward basis, trust preferreds were attractive when compared with common stocks or lower-yielding securities.

As it turned out, over the next 12 months, share prices of trust preferred securities, on average, increased by more than 50 percent, significantly outperforming common stocks and dramatically beating the paltry return on CDs and money market funds.

Many people are in the same predicament as they were a year ago: “What should I do with my cash?” Interest rates on bank deposits and CDs are still at astonishingly low levels. Pull out your most recent bank statement and take a look at what you are getting paid for cash deposits. It’s probably less than one-tenth of a percent.

And while the economy has slowly backed itself away from the ledge, the U.S. unemployment rate has remained high—9.7 percent in March. In fact, some 6.5 million Americans have been unemployed for at least six months. That’s a record.

With the consumer unlikely to fuel economic growth, it’s hard to get overly excited about the stock market, especially after its substantial recovery. At our firm, we have continued to devote cash to trust-preferred securities, where the yield is still attractive on a relative basis at about 7.5 percent.