Bank Convertibles That Offer Income And Upside

By Aryeh Katz | October 01, 2009 AAA

Investors are still debating whether there's any juice left in the bull move that began in March of this year and that's tacked on more than 50% to the major market averages. Many believe we're due for a correction at this point. Others say there's still plenty of cash on the sidelines, and investors are more than a little timid to sink funds into equities at this stage.
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Handsome Yields
If you're an income investor, but want to participate in possible market upside, convertible securities may be your answer. Below we highlight a number of financials whose convertible securities pay a handsome current yield, but also move with the issuer's underlying common stock. Because they're convertible directly into common shares, they'll capture the gains in the stock, yet shouldn't fall as far because of the cushion provided by the yield.

Southern Fried Money
Regions Financial Corporation (NYSE:RF) is an Alabama-based retail and commercial bank and brokerage, with operations in 16 states across the South, Midwest and Texas. The company offers a convertible preferred (OTC:RFNCP) which is rated by Moody's Ba2 and by Standard & Poor's as BB+.

The convertible offers a dividend yield of 5.39% and has appreciated by nearly 100% in just over two months!

SLM Corp. (NYSE:SLM) may frighten off those who remember what happened to the company's in-laws, Fannie Mae and Freddie Mac, last year. SLM, or Sallie Mae as it's more commonly known, is a federally insured agency that originates, services and collects student loans. For those without fear, SLM offers a convertible preferred (OTC:SLMVP) with a 14.76% annual yield and Ba3 and BB- ratings from Moody's and S&P respectively.

Two Rocket Shot Convertibles
This convertible has been no slouch, either. From 52-week lows set in March of this year, Sallie Mae's convertible has climbed an outrageous 275% - what better testament to the upside potential in convertible securities.

Legg Mason Inc. (NYSE:LM) offers a 7% convertible (NYSE:LMI) with a Baa1 Moody's rating and a BBB- from S&P. The stock currently trades for roughly $35 and yields 10% annually. It's up just shy of 200% in the last year.

Legg Mason is a broker with offices worldwide and just over $650 billion under management.

The Wrap
Financials still look frightening to some, though they've done very well wrapped up in a bull market this year. And these convertibles have certainly earned their keep. If there's more snort left in this bull, the above three issues may be the safest way to play it. (To learn more, check out Introduction To Convertible Preferred Shares.)

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