Obscure Investment Update

[Singuy]

I have been testing the water on some obscure way to invest besides the good old fashion index funds. Here's my 3 month update.

1. Start: $2,500 in lending club. Current return, 9.6%. 102 ($25/note) notes bought, 4 fully paid, 2 notes that are 30 days late. Total interest earned in 3 months, $83.

2. Start: $7,500 in preferred stocks (avg return of 7.5% dividend yield), both are taxed at 15% capital gains. 3 months later, my preferred stocks are worth $8,024, received $135 in dividend.

Will update in another 3 months.

My impressions so far: Lending club is not what is all cracked up to be. It's difficult to get vested due to big guns using automated bots, snatching up the good notes, leaving the no so desirable ones. I also don't like how the returns are taxed like interest, and the asset is not very liquid unless you use another program to sell the notes. I was going to put in 10k but stopped at 2500.

Preferred stocks so far I couldn't find any downside. As long as the company is healthy, the returns are pretty good and it's taxed at capital gains. I, however, have no idea what will happen if the market crashes.

I will be putting 10k into peer street next, along with another high yielding dividend stock.

[TexasHusker]

Take a look at viatical investments. A friend of mine is doing extremely well in that space.

[Singuy]

Update:

Lending club: 2500 invested, interest not being reinvested so I can slowly cash this out. YTD interest: 10.82%, YTD interest earned :$143@ 5months
2 notes are late beyond 30 days, probably will default out of the 100 notes.


Preferred Stocks : 7500 invested, worth 7911 today. Total Dividend payout : $185 since May. Average return is still 7.5% dividend yield, or total yield of 12%

Peerstreet: Total invested so far is $43,634 spread over 10 houses. Average return is 8%. 0 Defaults, YTD interest is $124 after 2 months.
Peerstreet's distribution is kind of weird, 1st and 15th of the month so interest doesn't represent all that's invested.

Currently I am not feeling the whole index fund vibe so I am pretty much only playing around with peerstreet today with all my savings. Will try Patchofland and realtyshares in a couple of months. This is not as tax efficient as index funds but I am waiting for some sorts of correction before jumping in.

[butler]

Hi Singuy, how do you invest in Preferred Stocks?

[LivingAlmostLarge]

I'm curious too.

[Singuy]

First you need to sign up with quantumonline.com. It is free to do so. I usually sort by IPO date and only touch the 15% tax efficient stocks..but sometimes look at the not so efficient ones as well.

You need to understand some fundamentals of preferred stocks first.

Convertible stocks: You can convert your preferred stocks into common stocks
Cumulative: If the company is having financial trouble and cannot pay out the dividend, they will tally it and will eventually pay it out.
Non-Cumulative: if they fail to make dividend payment, you are SOL and have to wait till next time.

Preferred stocks usually start at 25/share, 50 or 100/share. It works almost like bonds. They will pay you $x/quarter/share and this x amount is the dividend yield. For example..if they pay you $0.50/share/quarter..or 2 dollars/year on a 25 dollar stock..that's 8% dividend yield.

So with that being said, the trick is to get into the new IPOs so you can buy the stock at 25 or lower(the lower the better). If no one wants the stock in the beginning, it will sell for less than 25, say 23. At 23/share, they are still paying out the 2 dollars/year so in this case..even though the stock's name says 8%, you are actually getting a 8.7% yield due to the cheaper price. If you buy the stock at 27/share instead of 25 and still get the $2, your yield is actually only 7.4%.

Caveats/Risks:

1. Just like bonds, if interest rate goes up, the value of your preferred stocks will drop. We are at near 0% interest rates right now so the possibility of your preferred stock value dropping is real.

2. Because #1 is true, this makes the stock risky because most of the preferred stocks doesn't have a mature callable date. This means if you bought at 25, and it is now worth 23..the company is never obligated to ever buy it back at 25 unlike bonds with a maturity date. On the flip side, if the stock is worth 35 dollars, the company can call it back and give you say 27 dollars/share(whatever they set their call numbers to be at) when the callable date meets.

3. The stock raising in value is NOT the point of preferred stocks. The only reason why the value goes up is because people are looking for solid dividend yields in an economy where there's really little other choices..so they are willing to accept a lower % yield vs the original % yield. If you want growth, look for the company's common stocks instead.

To purchase the stocks, just use any online broker and search for the appropriate stock ticker. You buy and sell these like common stocks.

My recommendations

Research up on the company to make sure they are not in a debt hole. Check their S&P ratings as well. I generally probably wouldn't dump too much $ into this due to the entire interest rate thing. I feel it's probably okay for the time being since the rates will be pretty low for the next few years given how slowly we are raising rates..and probably jump ship once the rates are in the 2s.

I am not a financial advisor so these are not investment advices.

[LivingAlmostLarge]

can you give an example of a preferred stock you bought?

[Singuy]

can you give an example of a preferred stock you bought?

Amtrust financial services: AFSIPRE
Citigroup: CPRS

Currently all worth more than 25 dollars, I got in when they were slightly under 25.