By the time he retired after 19 years with the Boston Red Sox, Ted Williams was considered one of the greatest baseball players of all time.
He was a 19-time All-Star, two-time American League MVP, and two-time Triple Crown winner. He also capped his career with 521 home runs.
But those weren’t even the most impressive feats of his Hall of Fame career.
Williams had a career batting average of .344 – the highest of any player after the live-ball era started in 1920.
This wasn’t just luck, either.
Williams studied the art of hitting. He came to the realization that he could swing faster with a lighter bat. And that some pitches were more likely to connect than others.
After retiring, he wrote The Science of Hitting, a book players still reference today.
The book describes ideal zones to hit the ball. Williams would often let balls and strikes pass by if they weren’t in his zone.
This concept is known today as waiting for the “fat pitch.” It’s a concept that has big investment implications as well.
The investment world pitches ideas at you constantly. Many aren’t worth hitting. But some are.
In the world of fixed income, returns have been poor in recent years. Until the Federal Reserve started hiking interest rate hikes in 2022, AAA-rated corporate bonds yielded a paltry 2.3%.
That’s why at Palm Beach Research Group, we avoided them like the plague.
But with rates rising at their fastest pace in decades, fixed income is now in our zone.
Right now, there’s one part of the market where investors can get market-beating returns with less risk. It’s a “fat pitch” play that will help your odds of investment success.
The No. 1 “Fat Pitch” Income Play Today
The type of investments I’m talking about are preferred shares.
They’re called “preferred” shares because they give owners a priority claim whenever a company pays dividends or distributes assets to shareholders.
That places them just below traditional bonds, and just above equity (or stock) in a company’s capital structure.
As a result, the dividends they pay are much higher than common stock – often more than double or triple that of normal shares.
On the other hand, preferred shares don’t come with a vote in company elections.
Companies issue preferred shares at a set price, generally $25.
While these shares have less appreciation potential than common stock, they can trade at a premium or discount to their issue price based on their creditworthiness and prevailing interest rates.
That’s where the opportunity comes in…
Right now, you can buy some preferred shares at a discount between 30–40% from their issue price.
That means if they just go back to their par value of $25, you could see as much as a 50% gain, possibly in one to three years. That’s on top of the big yields you get paid to wait.
When you combine market-beating yields and significant appreciation potential… You can see why preferred shares can deliver double-digit gains with less risk than common shares in the years ahead.
Preferred Shares Investment 53% Better Than Stocks
Most preferred shares are tied to financial companies such as banks and insurance firms.
That’s because these companies need a reliable source of funding for their operations. Issuing preferred shares allows them to raise capital without going to the bond market or issuing more equity.
That brings us to a preferred share “fat pitch” today: the Bank of America Preferred Series PP (BAC-PP/BAC.PP/BACPP).
Bank of America is considered “too big to fail”… And that’s why it had the biggest increase in deposits fleeing smaller banks amid the collapse of Silicon Valley Bank and other players.
In total, the past month has seen a $37 billion increase in deposits.
The bank is operating well, too. In 2022, net interest income grew by nearly 24%, aided by rising interest rates. That’s a fantastic return, especially as asset prices were hit by rising interest rates.
Remember, retail banking is all about earning a spread between deposits and loans. Rising interest rates have increased that spread.
Simply put, Bank of America makes a bigger profit borrowing money from depositors – i.e., the cash you keep in your savings or checking account – when it can lend that money out at higher rates.
Right now, these preferred shares trade for about $18.30. They were issued at $25, and they’ll be redeemed at $25.
That means you could see a potential 36.6% return just on capital gains.
The preferred shares can (but don’t have to) be called in by Bank of America as early as February 2026, just under three years away.
Of course, these shares could jump back closer to $25 before then. If interest rates start to trend down, prices will move up. (Like bonds, preferred share prices move inversely to interest rates.)
Either way, a 36.6% return in three years works out to 12.2% per year. That’s nearly 53% better than the stock market’s historical average of 8% annually.
Meanwhile, the preferred shares pay out $1.03 annually. That’s a 5.6% yield.
Yet Bank of America’s common shares pay just 2.5%. That means the preferred shares pay over 2.2 times more income.
With the potential for double-digit capital appreciation and market-beating yields… Preferred shares trading at a big discount are the best “fat pitch” idea I know of today.
Good investing,
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Andrew Packer
Analyst, Palm Beach Daily
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