Most investors going after yields over 9% end up taking up substantial risks. For instance, dividend stocks yielding above 9% end up cutting dividends far more often than increasing them. Sounds awful. We don’t want to get a high yield today just to have dividend cuts and declining prices tomorrow.
So I’ll share a report with you that I recently sent to members of The REIT Forum before we purchased shares. Why am I sharing the same report I wrote for them? Because it’s great transparency. It also makes this article much easier to write. Can we not focus on that?
We’re looking at baby bonds. I like baby bonds because they are easier to trade than regular bonds, and they allow us to generate a strong yield with far less volatility.
The Recent Report
PennyMac Mortgage Trust (PMT) recently announced a new baby bond.
This is PMTW (PMTW). It looks extremely similar to PMTV. Both carry 9% coupon rates.
There are 4 main differences:
Shares trade under a different ticker.
Shares become callable 6/15/2027 instead of 2/15/2027.
Shares mature 6/15/2030 instead of 2/15/2030.
Shares will go ex-dividend and make payments 1 about month later.
That’s it. Those are the big differences. Due to the difference in ex-dividend dates, one share or the other will always have more dividend accrual. However, we can adjust for that pretty easily with share prices.
Pricing:
PMTV: Bid is $25.10. Ask is $25.12.
PMTW: Bid is $24.78. Ask is $24.80.
The difference in dividend accrual is worth a bit under $.20. Therefore, PMTW comes out looking better.
Because PMTW started trading very recently, the volume is much higher than normal. I plan to toss in a bid for PMTW. It might execute or it might not. I’m fine with that risk. If it executes, it would probably be pretty close to the market close. Consequently, the trade alert would hit after the market closed. That’s a good reason to foreshadow it explicitly right now.
Here’s the hourly price chart so far for PMTW:
Street Smart Edge
Notice anything? Right, the price is falling. Why? Because underwriters have a bunch of shares to move. They aren’t in the business of holding onto shares. They underwrite them at a discount and then look to unload them rapidly.
Thus far there have been 380,082 shares traded that I’m able to see. The prospectus indicates a goal of issuing $100 million. If the “over-allotment” option was used, it would be $115 million.
Sticking to the easy $100 million figure, they issued around 4 million shares. We do not expect all of those to result in recorded trades. However, that is high enough that I’m hopeful that we have some sellers trying to close out positions before the weekend. Consequently, I’ll toss a bid out there and see what happens.
This letter is going out to our subscribers, which can cause a surge in orders. Never use market orders.
What if the price jumps? Notice how I specifically said I would toss in a bid, but I didn’t say I would buy shares? If the price jumps, I’m absolutely not chasing it. No way. If I can get them cheap enough, that’s great. If not, I continue sitting on cash.
Google Sheets
The new shares are already programmed into our REIT Forum Google Sheets.
That’s the end of the first article. However, we purchased shares after sending the report.
The Trade Alert
After posting about the idea to subscribers, we ended up purchasing shares.
This is that article:
Trades placed:
* Purchased 1,223 shares of PMTW (PMTW) at $24.80.
Note: These are new shares and this is our first purchase. The resulting allocation is about 1.76% of our total portfolio.
Foreshadowing
I wrote about this in a note to subscribers earlier today (link removed because it went to the subscriber version of the article I just included above).
As I mentioned in that article, I wouldn’t chase if the price jumped. I was hoping we might see prices dip even further, but it didn’t happen. We saw some shares go a penny or two cheaper, but nothing really material. As I foreshadowed, I put in a bid for the shares late in the day.
Strategy
The yield to maturity is about 9.49%. Maturity is about 5 years out. This should deliver a reasonable amount of income. If we get an opportunity to enhance our position by trading, that would make it even better.
I may trade this position actively based on changes in yield to maturity and the spread between these bonds and Treasuries of similar duration. Shares are in a tax-advantaged account, which is nice for interest payments and short-term capital gains.
The Baby Bond Today
Shares of PMTW are still within our target price range. They rallied a bit more than the dividend accrual. At $25.05 today, we calculate a 9.35% yield to maturity.
Ideas Always Welcome
We got some great suggestions for charts in the comments of our prior article. I’m still going over possibilities for how we might add some of those charts. So long as I can get past the uploading, I can provide quite a few charts. In many cases, readers are asking for images (or tables) using data we either already have or can acquire quickly. So feel free to check out what we already have and make suggestions in the comments here.
