Last trade of the week – another income play

It’s been a quiet week of trading in the Amateur Investor camp as various work commitments have got in the way of building my fortune.

Just the one trade today, and regular readers won’t be surprised to hear it was a purchase for income…

So the banks aren’t exactly flavour of the month, or the year, or the last few years for that matter. But this has resulted in some tasty looking income prospects.

Today’s purchase was a small amount of Nat West 9% Preference Shares. These pay 9% per annum (based on the original face value of 100p I believe). But as the shares are currently trading “below par” the yield is actually higher.

My average purchase price was 93.36p today, so if my calculations and assumptions are correct and these shares produce income of 9p per annum then that’s a yield of 9.64%

My research unearthed that they have recently paid a dividend, so there will be some time to wait for the next payment – but I didn’t manage to find if they pay out once a year or every six months.

But whatever the payout frequency, 9.64% is worth waiting for in my opinion.

I think that this particular instrument is quoted “dirty”. An detailed explanation of the term “dirty” is beyond the scope of this post, but my understanding is that most preference shares are cumulative. So if one year the company behind the preference share has to cut the dividend, or ditch it altogether (as has been the case with big names such as Lloyds TSB), then the unpaid amount is added to the next dividend payment.

I think this also happens throughout the year, even when a payment will be made on the payout date. Effectively the income payment accrues daily which, means the underlying price of the share will rise over the course of the year to reflect the accrued dividend which hasn’t been paid yet. Because of this cumulative element, preference shares are dealt “dirty price”, i.e. with the quoted price including any accrued dividend.

I may have got this completely wrong. Please enlighten me if I am wide of the mark.

So to get back to the Nat West 9% “prefs”, as they have just made a dividend payment then the price of the shares is quite “clean”.

So with all these factors in mind, I decided to tuck some of these away in the Amateur Investor High Yield Portfolio.

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