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Profit from Rising Interest Rates by Investing in Adjustable Preferred Shares

By Carla Pasternak
Editor, High-Yield Investing
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Published:  October 19, 2005

Rising interest rates got you down? One way to help ease the pain on your portfolio is to invest in preferred shares with adjustable interest rates. In the most recent issue of our premium, income-oriented newsletter -- High-Yield Investing -- editor Carla Pasternak put the spotlight on a high-quality preferred stock that not only offers a 7.0% dividend yield, but that could also provide increased dividend payments as interest rates move higher in the coming months... 

Entergy Gulf States Preferred D (GSU-PD) -- With their $3.50 per share annual dividend payment, these preferred shares now yield about 7.0%. Besides offering an attractive yield, the dividend is also paid out at an adjustable rate -- or altered quarterly -- to keep pace with changing interest rates.

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If you believe rates will fall, then this is not the investment for you. But if, like many investors, you think higher rates are as inevitable as death and taxes, then adjustable-rate preferred issues like GSU-PD are the way to go. The stock's dividend rate is guaranteed to be 0.7% above the yield on the three-month, 10-year, or 30-year Treasury bill rate (whichever is higher), and not less than 7.0% or more than 13.5%.

The issuer, Entergy (ETR), is the second largest nuclear energy producer in the U.S. The New-Orleans based utility is a major electrical distributor throughout the Gulf States. Not surprisingly, its operations were affected by Hurricanes Katrina and Rita. But analysts see the impact as short-term and expect the company's profits to grow as its nuclear power-generating business provides an alternative to high-priced natural gas.

Meanwhile, the utility's credit rating has moved up a notch and is just below investment grade at BB+. Unlike many preferred shares, this stock does appear to qualify for the lower 15% tax rate.

Action to Take: After looking through about half a dozen adjustable-rate preferred share issues, I zeroed in on GSU-PD as offering the highest yield. However, in future issues of my premium income-oriented newsletter -- High-Yield Investing -- I plan to highlight other floating-rate issues with higher credit ratings.

Important Note:  To view the remainder of this article, in which Carla Pasternak provides dozens of other income-investing ideas just like this one,  you'll need to subscribe to our premium High-Yield Investing newsletter. After you subscribe you'll receive immediate access to the remainder of this article, as well as our monthly High-Yield Investing newsletter and a host of additional premium content. Please visit one of the following links to continue...


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