A column in the business section of USATODAY.com mentions two of the Royce closed end funds that I own, RVT and RMT, as potentially good buys.
I heard one of the Fast Money traders recommend buying TLT for next week-to each his own. CNBC.com TLT declined 47 cents on Friday to close at $102.32.
CVB Financial (CBVF) has finally come clean about recognizing a major loan loss. After receiving a subpeoena from the SEC (MarketWatch), and being sued in a number of class action lawsuits, the bank finally admitted that its largest borrower was not able to make principal and interest payments. I sold my shares last January after reading a story in MarketWatch about this bank and its largest borrower. It did not smell right. See: Sold 50 CVBF at 9.65 & Item # 5 CVBF It is not surprising that this bank released this news late on a Friday. SEC Filed Press Release If the shares fall enough in the coming weeks, I may consider buying back some shares but I would not buy more than 30 as a LOTTERY TICKET PURCHASE.
1. Differential in Pricing Between Equity Preferred Stock and Senior Bonds from the Same Issuer: How much of the current spread in yield between an equity preferred stock and a senior bond is attributable to the differences in the taxation of their respective distributions. Except for REIT preferred stocks, equity preferred stocks pay qualified dividends and the maximum tax rate on qualified dividends is 15%, at least for distributions paid before 2011. A senior bond pays interest taxable at the highest marginal tax rate of the the taxpayer which may rise in 2011. The Tax Foundation - List of Tax Provisions Scheduled to Expire on December 31, 2010
It is uncertain at the present time whether the qualified dividend tax rate will continue for any taxpayer after 2010. For taxpayers who are at, or near the highest marginal tax rate now, there is a clear tax benefit realized by owning a security paying a qualified dividend in a taxable account and a senior bond in a tax deferred retirement account. But what happens to the pricing of preferred stocks when their distributions are taxed at the same rate as interest paid by senior bonds?
This is a relevant issue now. Even if Obama is successful in allowing the Bush tax cuts expire for the top 2% or so, those individuals are a primary source for preferred stock demand due to the current tax deferential compared to securities paying interest. If Congress stalemates on the extension of the Bush tax cuts, resulting in the end of qualified dividends for everyone, then those investors who are in tax brackets between 15% and the highest marginal rate would have less reason than now to buy a preferred stock rather than a senior or junior bond from the same issuer.
In a totally efficient pricing environment, the spread in yield between the preferred stock and the senior bond would increase under either scenario (elimination of qualified dividends for everyone or just the wealthy), to account for the lost value of the dividends favorable tax treatment to many potential purchasers on the demand side of the equation as well as existing owners on the sell side.
I have recently had a discussion with a reader on this topic, and have used two securities from Goldman Sachs to illustrate my point. The following is a quote from my email: