Personal Finance

One of America's Largest Companies Flashes a Warning Sign for Income Investors

In a former life, I worked as a manager and analyst at IBM ( IBM ) for almost 20 years.

During my time there, I was in charge of some pretty big budgets -- some reaching nearly $100 million a year. But at a major company like IBM, there are some even larger numbers in play.

Case in point: On Monday of last week, IBM sold $1.5 billion in bonds. It was a good time to do it, too. According to The Wall Street Journal , the three-year notes were issued with an interest rate of just 1% -- barely above what similar Treasuries pay.

But it's not news that companies are issuing debt now to fund their business. Remember: rates are at record lows. If you think you'll need the money, it's a great time to issue bonds.

However, it is news that IBM is doing it.

My former employer has an uncanny track record when it comes to the timing of its debt offerings. IBM seems to know when interest rates have hit lows, and issues debt just as rates are about to ratchet back up. It happened in 1979... 1989... 1993... 1995... 1996... 2002... and 2009. It happens so frequently that some investors use it as a signal for where rates are headed next.

"They send the best signal in the market," says Jack Ablin, who is the chief investment officer of Harris Private Bank in Chicago.

Now, IBM's record isn't perfect. For instance, when the company issued debt in 2009, it may have been a short-term low, but we can see that rates have fallen even lower than they were back then. But when you combine its history with some of the more glaring facts that interest rates eventually have to rise -- they can't go much lower -- the case for learning how to protect yourself from rising rates now becomes stronger.

Here's the situation: If you're an income investor, you typically have a considerable amount of your portfolio in bonds and other fixed-income vehicles. The steady prices and income make them right up your alley. When interest rates rise, however, it usually makes previously issued bonds fall in value -- since investors can now lock in higher rates.

I can't say when rates will rise (even with IBM's move). The Fed says they'll keep them low for an "extended period." But I can say they will rise, and that's why I'm looking now for ways to protect my portfolio.

So far, I've found some high-yield bonds that yield so much they are unlikely to be impacted if rates rise slightly. I told you about one of these last week . But I've also found a preferred stock -- with a twist -- to add to my portfolio.

This preferred -- issued by one of the major banks -- currently pays close to 8%. The "twist" is that in 2013 the interest paid on the preferred begins to float , paying LIBOR plus about 4%. That means if interest rates rise, so will my payments.

These sorts of securities are exactly what we need to protect our portfolios from rising rates. You should, however, keep in mind they are a double-edged sword. If rates stay low, then this floating rate will fall come 2013. But I don't think that will be the case.

As I mentioned last week, the best place to begin your search for these sorts of special securities is QuantumOnline.com . If you're the type that loves to dig down and research, it's a great resource.

We can't tell yet if IBM has called another bottom in interest rates, but one thing is certain: It's better to start preparing your portfolio for rising rates now than before its too late.

Amy Calistri is the Lead Investment Analyst behind StreetAuthority's Stock of the Month and The Daily Paycheck . Amy has broad experience in finance, including helping to manage over $5 million in trust funds for a non-profit. Before joining StreetAuthority, she created and taught online investment courses used by Bloomberg.com and National City Corporation and even worked with noted economist James Galbraith, with whom she authored several publications. Read more...

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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.


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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