Published:
April 16, 2009
There are only eight of these
securities in the world.
They carry an astronomical average
dividend yield of 17.2%.
 Let's
not gloss over that number. Let's
take a look at what it can do for
you. As the chart shows, a high rate
of return can provide an immense
gain for your dollars.
These securities marry one common
share and a bond issued by the
company. The lion's share of the
distribution is fixed interest
income. The rest of your return
comes from the stock dividend
powered by the company's cash flow.
And that's before you ink even a
dime's profit on the capital gain
from the security.
As if all of that weren't enough,
these investment vehicles have been
a bulwark of stability amid the
market turmoil of the last few
months.
In fact, they have delivered
impressive total returns (including
dividends) of +9% so far this year,
well ahead of the broader market
loss of -12% as measured by the S&P
500 index.
Double-digit yields and dividend
safety often make an uneasy pairing
in today's markets, but these
securities are a rare exception.
Part bond, part stock, these hybrid
securities offer the security of a
bond's fixed income and the growth
potential of a stock.
For example, a rural telecom
operator that has issued one of
these securities pays a quarterly
distribution of $0.42. Each security
is comprised of one common share and
a note issued by the company paying
a fixed rate of 13%. The total
distribution reflects a cash
dividend $0.17625 per share and an
interest payment of $0.24375 per
note.
That's a lot to keep track of, so
let's flip to the last page: The
distributions together with share
price gains have contributed to +27%
returns so far this year. That makes
a 17.2% dividend yield seem outright
paltry!
Now, the stock dividend portion of
the payout may go up or down -- two
companies raised their dividends
this year, one slightly reduced it,
the rest kept them stable. In any
case, whatever happens to the
dividend portion, the bond payment
remains fixed, giving you an extra
degree of security in volatile
markets. All but two of these
securities pay distributions
monthly, which provides another
layer of payment protection.
In addition, these companies throw
off steady cash flow from stable,
recession-proof businesses. One is
the fifth-largest funeral home
operator in North America, another
is one of the top 40 local phone
operators in the U.S., yet another
distributes some of the best known
brands of packaged foods in the
country. They also count among them
the fifth largest provider of school
bus transportation services in the
U.S., and the nation's leading
manufacturer of heavy-duty transit
buses.
The companies are industry leaders,
but their publicly traded securities
lie under the radar of most Wall
Street analysts. That's partly
because there are so few of them,
but also because they originally
were designed by Canadian investment
bankers for U.S. companies seeking
to tap the Canadian capital markets.
In the early 2000s, these companies
were looking for an investment
vehicle that would provide a
tax-efficient way to distribute
their cash flow to shareholders,
something like the Canadian income
trust but better suited to American
tax laws.
The result: A hybrid security that
goes by many different names. We
call them "income deposit
securities," but they are also
called "enhanced-income securities"
or "income-participating
securities."
Whatever name you use, they're
essentially the same.
Like Canadian income trusts, they
pass along to shareholders almost
all their cash flow. Fortunately,
however, these securities don't
share the same fate of Canada's
royalty trusts, which are doomed to
disappear in 21 months. As the
legislation passed by Canada's
federal government now stands,
companies that issued these
securities are corporations not
trusts. As such, they shouldn't need
to convert to ordinary tax-paying
corporations by January 1, 2011 like
Canadian royalty trusts.
Two of these securities trade on
major U.S. exchanges. The rest are
listed on Canada's benchmark Toronto
Stock Exchange but also trade
over-the-counter in the U.S. As a
U.S. investor, you can trade
Canadian-listed stocks with either
the Canadian ticker or U.S. ticker.
The shares are more actively traded
on the Canadian exchange, but you
can trade online more easily with
the U.S. ticker and save the cost of
calling your broker. Canadian
tickers will give you the most
recent price in Canadian dollars,
while the U.S. ticker gives you the
last U.S. trade in U.S. dollars.
Thanks for joining me on the search
for the world's best income
opportunities!
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
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market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
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inception in May 2004, Carla Pasternak draws on a variety of financial
backgrounds to make profitable calls on income-generating stocks for her
readers.
Carla has been employed in the investment industry for more than two decades.
In addition to her work as a writer for several nationally recognized financial
publishers, her previous experience includes a position as president of a
well-respected investor relations firm. She has also been writing shareholder
reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select companies
that not only pay rich dividends, but that also deliver strong long-term capital
gains. Furthermore, Carla's experience in writing SEC filings gives her the
added insight required for her to truly understand a company's current and
future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When
she's not watching the market, she's teaching business courses at the college
level and managing millions of dollars in portfolio assets.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
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