Markets

This 6.2%-Yielder Hasn't Dropped in the Sell-Off

As the editor of the income-investment newsletter The Daily Paycheck , it's my job to find safe, high-yielding investments that my readers can hold without worrying about the ups and downs of the market .

Today, those securities can be difficult to find. So finding them canmean going off the beaten path. Of course, this is not always a bad thing.

For instance, I've been watching a special class of high-yield investments that is holding up quite well right now. Their prices tend to stay up whenever the market panics and they pay reliable dividends that cannot be reduced or taken away.

The way the market's been behaving lately, these are two qualities that are all too rare.

The S&P 500 dropped 14.3% in the three months leading up to October and has bounced around the 1,150 mark since August. And the markets are still weighed down by European debt woes, the U.S. debt debates and general concerns that the world's economies are slowing.

In truth, the amount of uncertainty out there can cause the stock prices of even solid companies with consistent cash flows to be unpredictable.

So where can you find high-yielding securities with stable prices in this environment?

Take a look at this chart for an example:

-- Amy Calistri

This chart shows the price performance of Wells Fargo's (NYSE: WFC ) common stock versus the bank's investment-grade preferred shares -- Wells Fargo Capital XI, 6.25% Trust Preferred Securities (NYSE: FWF ) .

Notice that the preferred shares have kept their value this year, while the common stock has plunged as far as 25%.

FWF is just one investment-grade fixed-income security that's been relatively unrattled in this skittish market. And in some ways, this is to be expected.

Preferred stocks are often issued for a fixed amount of time. When the security reaches its maturity date , the issuer is obligated by contract to redeem the shares at their original issue prices -- generally $25 per share.

Because everyone knows what the final price of these securities will be -- when they either mature or are called -- they tend to trade in a range around their offer price . This gives them price-stability in downward markets.

Most importantly, while you may not see a lot of upside gains with these securities, you can always count on the high yields these investments pay.

You see, the income from preferred stocks comes with stronger guarantees than common share dividends. A company's board can cut or discontinue common share dividends at any time. But preferred shares carry a contractually set, fixed-dividend yield for the life of the security.

In the case of FWF, the agreed-upon yield is 6.25% -- more than three times the 2% that Wells Fargo common shares pay at current prices.

I'm not saying these investments are totally free of risk. Companies can default on their obligations and the price of fixed-income securities can drop when interest rates rise.

That said, even in recessionary periods, the default rate on higher-quality. fixed-income securities is quite low. And since the U.S. Federal Reserve has vowed to keep interest rates low, there's also little interest-rate risk for the foreseeable future.

Action to Take --> This means solid companies with consistent cash flow that issue preferred stock can be safer places to generate higher income in uncertain markets.

This fits into the strategy of my monthly income newsletter, The Daily Paycheck , perfectly. I want to build a portfolio of reliable, high-yield investments that pays a dividend check every day of the year.

I started The Daily Paycheck portfolio with $200,000 less than two years ago and by investing in securities like FWF, I've built an income machine that is already paying me over $1,300 per month on average.

If I can lock in a legally bound 6% yield and feel secure that I'm not going to lose much if anything on my purchase price... that's a pretty sweet deal, especially these days.

P.S. -- FWF is not the only fixed-income security I own in The Daily Paycheck's real-money portfolio. If you're interested in learning more about the strategy, be sure to read the course we put together. It's called 59 Checks a Month and it covers some of the rules -- and includes eight stocks -- I've used to build my portfolio. Visit this link to read it now.

Disclosure: Amy Calistri and/or StreetAuthority, LLC hold a position in FWF.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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