Too Much Cash Will Kill Your Returns

Time and time again we write that you can’t win the game if you are not playing the game–simply meaning that in income investing you won’t receive dividends and interest if you don’t own the stock, bond or other income instrument.

Unfortunately, just like a lot of you, we are continually experiencing optional redemptions (virtually all preferred issues and baby bonds are callable–or redeemable–after a 5 year period. After this period the issuer is free to ‘redeem’ the shares or bonds for par plus accrued dividends or interest). Most recently we had the Affiliated Managers 5.25% Senior Notes (ticker:AFW) called and we had shares in both our 2014/2015 Short/Medium Duration Portfolio as well as in the 2015 Moderate Duration with Zip Portfolio. Both of these portfolios are quite conservative with a modest overall yield and having too much cash obviously hurts the pocketbook.

Both portfolios now have over 10% cash and the current yields have fallen by near 1%. Obviously we had to get the money reinvested so we have done so.

In the 2014/2015 portfolio we have purchased Gladstone Investment Corp 6.75% Term Preferred stock (ticker:GAINO). Additionally we have ‘doubled up’ on the shares of Saratoga Investment 7.50% Notes (ticker:SAQ).  Both of these companies are Business Development Companies (BDCs) that are reasonably good companies.  The maturities are out a number of years although the Saratoga Notes have a early call in 6 months so there is a risk of having them called, but given their price ($25.12) it is worth the chance of needing to reinvest again.  With potential for rising rates them may well not be called.

In the 2015 Medium Duration Portfolio with Zip we have purchased shares in TravelCenters of America 8% notes (ticker:TANO) as well as shares in Gladstone Investment Corp 6.75% term preferred (ticker:GAINO)  (same as noted above).

With the above we will get these portfolios back to where they should be as far as cash deployment as well as raising the current yields back to the mid 6% level, which is where we want to be in these conservative models.