Net Worth Update:

 

Asset/Liability Value
LendingClub 5,501.04
Schwab 12,284.81
I-bonds 5000
Cash 3184.38
Debt 0
NetWorth: 25,970.23

An ingenious plan spurred with greed

I love Korean BBQ.  Its perhaps my favorite style of meat to consume.  What I don’t like about Korean BBQ is the price – it cost at least $25 for any good quality Korean BBQ place in California.  So, then I thought to myself, what if I could obtain Korean BBQ without paying for it?  Then, I got thinking of how I could accomplish that.  I realized that I needed to obtain an asset that would pay me enough money each month to purchase Korean BBQ.  With that, I got researching and landed at preferred stock.  Not just any preferred stock, but super high risk, high yield preferred stock.

Why Preferred Stock as your vehicle to obtain infinite KBBQ?

Preferred stocks are nice for a few reasons:

  • They usually pay nice dividends
  • Most are taxed at favorable rates
  • They have priority over common shares (meaning they are safer)

Unfortunately, the safe preferred stocks are usually purchased by a bunch of investors looking for safe yield, meaning they often sell for inflated prices.  Also, like purchasing single stocks, purchasing single preferred stocks is really risky because they do have a chance to default and lose a lot of value.

A preferred stock that nearly went to zero because of an impending default! However, it has since gotten back on its feet and currently makes dividend payments each month.

Fighting risk with more risk

Ultimately, in order to chase yield, I also needed to add risk.  Unfortunately, adding risk means that the chance of me getting screwed goes way up.  In order to counteract this, I decided to take even more risks.  Instead of investing in one high yield, high risk preferred stock, I decided to invest in many.  By taking on more separate risks, I can lower my overall risk.

The most efficient way to do so was to invest in an exchange traded fund that holds a lot of preferred stock.  However, as I was looking through ETFs, I couldn’t find any yielding 10+% (which is my desired pre-tax yield).  As a result, I decided to ball it up and create my own mini-ETF.

Negotiating my problems away

The difficulty with creating a mini-ETF is that you have to purchase a bunch of different shares.  Purchasing a bunch of different shares is pretty costly since you have to pay commissions on each trade.  This was a huge obstacle preventing me from enjoying free Korean BBQ every month.  So, I decided to ask someone at my brokerage to see if I could do anything about it.  After talking with a customer representative, I negotiated 10 additional free trades provided that I would deposit an extra $5K into my Schwab brokerage account.  (This was a win for me since I was planning on investing $5K regardless, and it saved me the trouble of signing up for a new brokerage).

The Junk that I Decided to buy

I just searched for the highest yielding preferred shares on the market.  I also did a bit of background research to make sure that the company behind the preferred shares was legit and wasn’t going to crumble any time soon.  Basically, my criteria was that the stock had to yield at least 10% pre-tax.  If you’d like to see the list of stocks I bought, here’s a link to my research spreadsheet.

After doing my research, I split my $5000 into ten different groups of $500.  I then proceeded to purchase $500 worth of the 10 preferred shares on my spreadsheet using the 10 commission free trades I negotiated with a Schwab representative.

My expected return

If all goes well, and none of my preferred shares default, I’ll get an ~8% post tax return (which is pretty dam good).  This will result in about $36 a month (post-tax). $36 is more than enough to buy some nice quality Korean BBQ.  Heck, I can even pay for a good portion of my friends meal!  However, life never turns out to be ideal, and I’m sure that I’ll lose something.  I’m actually expecting to make somewhere between 5-8% depending on defaults.  Regardless of how this turns out, I have pride in the fact that I refused to accept the status quo (lame safe ETFs) and chose to build a portfolio with the potential to realize my dreams – my dreams of free Korean BBQ.

Week 18 Update                                                                 Week 22 Update