At the World MoneyShow, speaker David Gladstone mentioned an interesting idea…
It’s something I immediately thought of as the Seven-Percent-A-Year CD.
In this idea, you get 7% a year in interest… And in less than five years, you get your original investment back. Sounds like a CD to me – but with a much higher interest rate.
And it’s not the only one of its kind…
[ad#Google Adsense 336×280-IA]The Seven-Percent-A-Year CD is not issued (or guaranteed) by a bank.
It’s not backed by the FDIC.
It’s actually a “term preferred stock” that trades on the New York Stock Exchange.
It was issued by Gladstone Capital.
So your main concern is the creditworthiness of the issuer – Gladstone Capital, which lends money to small and medium-sized businesses.
What’s interesting here is, in plain English, if Gladstone goes bust, you’d get paid ALL of your principal AND interest back first, before shareholders – including David Gladstone himself – would get any money for their shares.
And that is the big difference between “preferred” stock and regular stock.
If a business goes bust, then when everything gets liquidated, lenders get paid first, preferred shareholders get paid second, and regular stockholders get paid last.
Preferred shares sit right between bondholders and stockholders. So they share some characteristics of both…
They pay a fixed interest rate, like a bond. The issuer has a legal obligation to pay the interest, and it must pay back your loan at the full face value of the preferred stock. So preferred stocks tend to be much less volatile than standard shares. But many of them trade on the stock market just like regular stocks do. You pay the same commissions and trading fees as you would for any other stock purchase.
With interest rates so low right now, the yield you can get on some preferred shares are attractive. But to get the high interest, you have to be careful about the price you pay.
The Gladstone preferred stock, for example, will yield 7%, as long as you don’t pay more than $25 for it. If you pay more than $25, your net interest rate goes down dramatically:
As you can see, the more you pay, the more you start to shoot yourself in the foot.
If you’re interested in these particular preferreds, do your homework on Gladstone. And USE A LIMIT order. There are very few shares outstanding. And buying interest from this DailyWealth letter could cause the price to spike.
If you’d like to see what else is out there, the “go to” place for information on unique securities like these is www.QuantumOnline.com. It’s free, but you need to register before you can use it. Click on “Income lists” and then select “All preferred stocks.”
In a world where it’s hard to find decent interest on anything, preferred stocks may be a great place to look.
Good investing,
Steve
P.S. In the latest issue of my True Wealth newsletter, out just days ago, I share my favorite “high-yield CD” idea. It is much less risky than this Gladstone preferred stock… but you will still get paid a high rate of interest. For more on True Wealth, click here.
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Source: Daily Wealth