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Generally speaking, companies with solid financial positions make safer investments than those with weak balance sheets. Although this may seem obvious, it follows that investors in fundamentally sound companies are more assured of dividends and interest payments. This makes sense, as financially strapped enterprises would likely have more difficulty making payments to bond holders and shareholders than a company with an iron clad balance sheet.

That said, convertible notes and convertible preferreds issued by high investment-grade companies are generally viewed as less likely to default on their obligations and, thus, are often expected to offer lower coupons and smaller yields when compared to weaker companies. Again, on the surface, this makes a great deal of sense, since the higher coupon would compensate for the added risk that comes with the potential for not being paid.

This quality/yield dynamic, however, isn’t always the case. Indeed, there are some quality issuers, such as MF Global (MF), Universal Corp. (UVV), and Bank of America (BAC – Free Bank of America Stock Report), that all have high-yielding convertible bonds and/or preferred stocks (a brief overview of each is below the table). So, investors need not give up quality to get a higher yield in all cases. Still, investors need to be picky. Below is a short list of high investment grade convertible securities in our universe that defy the common logic by offering a high yield as a starting point for further research.

 

 

Conv

Curr

 

Com

Com

Com

Convertible Securities

Symbol

Price*

Yld(%)

YTM(%)

Ticker

Price*

Yld(%)

MF Global Ltd 9s2038   

      

114.38

7.9

7.9

MF  

$7.66

 NIL

Wells Fargo(Wachovia) $75.00 L 

WFC L

$1,060.01

7.1

 

WFC 

$27.37

1.8

Huntington Bancshares $85.00 A 

HBANP

$1,149.17

7.4

 

HBAN

$6.30

0.6

Hartford Fin'l (The) $1.8125   

HIG A 

$24.79

7.3

 

HIG 

$24.62

1.6

Bank of America $72.50 Series L

BAC L 

$1,005.05

7.2

 

BAC 

$10.79

0.4

Wintrust Financial $3.75       

WTFCU 

$52.09

7.2

 

WTFC

$31.80

0.6

KeyCorp $7.75 A                 

KEY G 

$111.47

7.0

 

KEY 

$8.18

0.5

Universal Corp $67.50          

UVVZP 

$982.00

6.9

 

UVV 

$37.67

5.0

Alexandria RE Equities $1.75 D 

AREEP 

$26.17

6.7

 

ARE 

$79.53

2.3

Affiliated Cap Tr $2.575       

AMAPL 

$42.50

6.1

 

AMG 

$98.53

 NIL

* Prices as of June 17, 2011

Highlighted Convertibles:
MF Global
is a leading brokerage firm offering customized solutions in the global cash and derivatives markets. The company provides execution and clearing services for products in the exchange-traded and over-the-counter derivative markets, as well as for certain products in the cash market. MF Global operates worldwide, with a presence in the United States, the United Kingdom, France, Singapore, Australia, Hong Kong, Canada, India, and Japan, among others. It provides clients with global access to more than 70 securities and futures exchanges, and also facilitates trades in the over-the-counter markets. The corporation is one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York. MF helps clients meet trading and hedging needs through customized solutions, market expertise, and value-added research.

The company’s investment-grade-quality 9% convertible note due 2038 is an attractive alternative the common stock, whose volatility is above average. Furthermore, the common does not pay dividends, while the convertible, which is less volatile, provides a current yield of 7.9%. The notes trade deep in the money and are callable and putable at par on or after July 1, 2013.

Universal Corp., formerly Universal Leaf Tobacco, is the world’s largest leaf tobacco exporter/importer. It engages in the purchasing, processing, and selling of tobacco to cigarette, pipe tobacco, and cigar manufacturers. The company conducts business in more than 35 countries and employs more than 25,000 permanent and seasonal workers. Tobacco sales consist primarily of flue-cured and burley tobaccos. The company sold its lumber and building materials business and the majority of its agricultural products division in 2006.

There are some heightened concerns about Universal’s ability to fill the void that is being created by cigarette manufacturers’ new methods of procuring tobacco leaves themselves. And as market fundamentals weaken (oversupply of leaves, which will surely have an impact on pricing), the long-term picture is somewhat hazy.

Still, there is some good news. The company’s day-to-day operations are generating more cash than needed, which may lead the company to repurchase stock and raise the common’s dividend. In addition, the company is streamlining operations and has closed a processing plant in Ontario.

The hefty common dividend makes it worthwhile (current yield is 4.6%) for investors bullish on the stock, but the company’s 6.75% convertible preferred shares offer a higher and more secured income stream.

Bank of America Corp., which was formed by the merger of NationsBank with BankAmerica in 1998, has acquired a number of financial institutions along the way; the latest being Merrill Lynch in 2009 when that company caved under the mortgage debacle. The bank has more than 5,800 offices in 29 states and Washington, D.C.

The bank’s opening quarter was disappointing. Share net of $0.17 was far below the $0.28 sequential comparison. This drop was attributed to mortgage expenses that included litigations and a provision for the costs of resolving mortgage repurchases claims. Despite mounting high mortgage costs, the bank is expected to stage some recovery in 2012 as the number of foreclosures is reduced, smaller loan provisions implemented, and recent declines in delinquencies.

The Value Line Investment Survey does not expect much from the stock over the next six to 12 months; and the dividend is just $0.04 a share annually for a yield of 0.4%. The stock’s 3- to 5-year recovery potential is attractive, but the risk level is relatively high. Long-term investors with a bullish outlook for the stock may find the bank’s 7.25% Series L convertible preferred stock more attractive. The less volatile preferred shares are more price-stable, and offer a 7.0% current yield advantage.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.