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Msg  431 of 481  at  6/29/2020 8:27:22 PM  by

fpsully


 In response to msg 188 by  fpsully
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Re: Bought Some KTBA Yielding 6.2%

KTBA Trust - A Bond Investment Yielding 6.1% Backed By AT&T

I mentioned that besides AT&T common stock yielding 6.8%, I also own the KTBA Trust yielding 6.1%. This is not actually a perpetual preferred but looks like one. It is actually a Bell South 7% bonds maturing in 2095 trust acquired by AT&T. KTBA trust units have a face value of $25 and pay 7% ($1.75/year). See article below. They are not callable. KTBA currently sells for $28.51, about where I bought it several years ago, so it yields 6.1%. For someone looking for a high-yielding investment grade bond investment.
 
Cheers,
Sully
 

A 7% Yield From This Telecom Issue For Extra Income

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25 comments
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About: AT&T Inc. (T)
Josh Arnold
Long/short equity

In the never ending search for yield many investors fail to look beyond common stocks and ETFs. However, if you are willing to dig a bit you can find terrific issues that may otherwise go unnoticed. One such issue is the Corporate Back Trust Security BellSouth 7% Debenture Due 2095 (KTBA). This security is a relic of a bygone era that investors can still purchase today and enjoy interest payments for the next 80+ years. In this article we'll take a look at KTBA and see if it may have a place in your income portfolio.

First we'll start with defining exactly what this security is. With a title only a banker could love, it can be a little confusing to decode exactly what we're looking at. This issue is an exchange traded debt instrument of sorts. It is essentially a trust that was created to issue certificates (shares) and use the proceeds to purchase a debenture issued by the subsequently acquired BellSouth. Of course, BellSouth became part of AT&T (NYSE:T) so that is who is ultimately responsible for paying the interest on these debentures now, which then gets funneled back to certificate holders. If you look past all the meaningless legal maneuvers going on, if you buy KTBA, you are essentially buying what are now AT&T debentures.

As you can see in the title, these debentures aren't due until 2095. While I understand this kind of maturity date could be seen as the poster child for interest rate risk, bear with me. These debentures aren't callable under any circumstances by AT&T. In fact, not even BellSouth's sale to AT&T was enough to call these debentures. In addition, the very small size of the offering, only $50 million in total, means that AT&T likely isn't particularly worried about this issue anyway given the tens of billions of dollars of debt it has.

This brings us, however, to the main risk of owning this issue and that is interest rate risk. Anything with a maturity of more than 20 years or so is going to suffer from tremendous volatility due to interest rate movements. KTBA is not immune from this effect and likely never will be, at least not until 2090 or so. However, if you are a long term income investor I still think there is some value to owning KTBA. While it certainly isn't for everyone given its ridiculously long maturity, it can still have some value for certain income investors.

At the issue price of $25 per certificate, the $1.75 annual payout is good for a 7% yield. As shares are currently trading for a slight premium to the issue price, 30 cents as of last Friday, the current yield is just under that. Thus, if you are long KTBA you are getting a 7% yield from a dominant telecom that has demonstrated over many decades its ability to service debt.

There are a couple of other issues that income investors should be aware of with KTBA, however. First, these payments are interest and not dividends, meaning that they aren't subject to favorable taxation rates. Any payments received by holders of the KTBA are ordinary income and thus, are taxed at a higher rate than dividends. Of course, if you hold KTBA in a retirement account it doesn't matter but for those investors holding KTBA in a taxable account, that could be a big negative.

Second, interest payments are made semiannually instead of quarterly. While this isn't a huge deal for longer term holders, if you are relying on income received from KTBA to come each quarter this could be a potential negative. Like I said, if you're holding in for the long term in retirement account it shouldn't be a big deal but don't expect quarterly payments with KTBA. And if you rely in security income as a source of covering living expenses, KTBA probably isn't for you.

Overall, KTBA is a quirky but interesting issue. It sports a very high yield from one of the safest payers around in AT&T. It only pays semiannually and doesn't qualify for the favorable tax treatment of dividends but in a retirement account, neither of those factors mean anything. The major risk with an issue like this one is simply the very long maturity. This debenture doesn't mature for another 82 years and as such, it is subject to interest rate risk. However, if you average in and don't mind picking up more shares in the event interest rates spike, it could be a nice addition to your income portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 


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