Many savvy investors look to convertible bonds as an attractive alternative to common stock. Convertibles can be exchanged for common shares in lieu of repayment of the note signified by the bonds. They generally yield more than the underlying common and provide nearly as much upside potential as the common with less risk.
One drawback: Convertibles usually sell at a premium over the conversion value (the value of the common shares into which they may be converted) because of the higher yields. See convertible bond for more information.
What to look for: Situations do occur where the common provides the higher yield and/or where the bond is selling so far above par value that its yield has become relatively insignificant. As a result, the convertible bonds may be selling close to or even below their actual conversion value.
Investors familiar with convertible opportunities may be able to take advantage of such situations by following this procedure:
Before purchasing common stock, check to see if convertibles, either at conversion value or below, happen to be available.
If you purchase convertibles at conversion value, you will save on commissions. And if you buy below conversion value (rare, but sometimes possible), you will have purchased the underlying common at an effective discount: The differential between the bond's conversion value and actual price.
If the common provides a higher yield than the convertible bonds, have your broker submit the bonds for conversion (usually takes two to three weeks). You will then be holding the higher-yielding common, purchased at a discount. Warning: Don't submit the bonds for conversion until immediately after the next interest payout, unless the payout has just passed. Bondholders lose accrued interest upon conversion. Most bonds pay interest semi-annually.
Buying advice: Don't place "market orders" for convertibles. Bond markets are thinner than stock markets, and you can be hurt by a wide spread between bid and asked prices. Place definite limit orders.
Now I will discuss investing in utilities. Utility stocks, more than most issues, are purchased for reliable income by conservative investors who may require current income from investment holdings. Here are some guidelines that may help avoid unpleasant surprises.
Is the utility located in a state with a favorable regulatory climate? Some states make it very difficult for utilities to pass along rising costs to consumers, some states are more permissive. The typical state will generally grant the utility approximately two-thirds of the rate increase requested. It will usually require approximately one year following such requests to provide the necessary authorization.
The utility should have ample earnings from which to pay interest on any bonds outstanding. Utility companies are generally heavy borrowers of capital for expansion. Should a cash flow bind develop, dividend payouts may have to be suspended, since bondholders hold first call on company assets. Earnings for the company should amount to at least 2.5 times the interest payments due on corporate notes; preferably more. In considering any stock for its dividends, make certain that earnings are ample to cover projected dividend payouts.
The price of the shares should be no lower than book value if the company has plans to issue more shares. Otherwise, shareholder equity will be diluted by such distribution.
The company shouldn't payout too high a percentage of earnings in dividends. Approximately 65-70% is average payout. The lower a percentage of earnings in dividend payout, the more protected the dividend will be.
Check the balance sheet for excessive debt and for favorable asset-ta-liability ratios.
Your broker should be able to provide the above information either by means of in-house research or through access to Standard & Poor s ratings of corporations and corporate debt.
Now some gold investing alternatives: Investors looking for gold coins that can be traded without the obstacles that apply to Kruger ands should consider: (1) Canadian Maple Leaf: It's got the greatest purity of any gold coin and is very liquid. (2) Mexican 50 Peso: It's 1.2 ounces (.2 ounce heavier than most others). It's as tradable as the Maple Leaf. (3) Austrian Corona: It's slightly under one ounce and may be less easily traded than others.
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