Go!
Tech stocks don't fit the typical income investor's profile. But which of these instruments allow investors to lock in double-digit yields of 10%, 11%, or 12% and also participate in the tech rally?

A.) TIPS
B.) TIGRs
C.) SPDRs
D.) STRIDES
E.) ADRs

Published: July 3, 2009

The correct answer is      (D.) STRIDES.

As an income investor, tech stocks don't fit the typical investing profile because they carry a low or non-existent yield. But should income investors turn a blind eye to the tech sector? The answer is an emphatic no!

Tech stocks outperformed other sectors in the past five recessions and are typically a leadership group at the end of an economic downturn. In the last recession of March to November 2001, for instance, Nasdaq 100 and the S&P both hit bottom in September. By the end of December, the broader market was up by just over +24% while tech stocks had soared over +59%. This pattern is being mirrored so far in 2009.

One way income investors can get in the game is through high-yield instruments known as CORTS, STRIDES, and ELKS, which exist on tech bellwether stocks like Google, Cisco, Apple, and IBM. What do these odd names stand for? Strides are Stock Return Income Debt Securities; CORTS are Corporate Backed Trust Securities; and ELKS--the simple one--stands for Equity-Linked Securities. STRIDES are a product of Merrill Lynch, acquired by the Bank of America (NYSE: BAC); ELKS are issued by Citigroup Funding, a subsidiary of Citigroup (NYSE: C).

These securities allow investors to lock in double-digit yields and participate in the tech rally. The securities move in lockstep with the underlying stocks but thanks to a conversion option, they participate in the upside while protecting the downside risk. They do this by trading like stocks but providing a double safety net of being considered senior debt.

Take for example, the Merrill Lynch Callable 12% STRIDES on Apple (Nasdaq: AAPL) which trade under the symbol AVN. They pay a yield of 11.8% at current prices, and they're also closely tracking Apple's heady share price gains. On March 6th, AAPL hit bottom at $82.33. The STRIDES, which were issued at $25, traded at $16.39. As AAPL rallied from March into mid-May, so did the STRIDES. AAPL hit a recovery peak of $131.12 on May 5. The STRIDES traded as high as $25.05. In other words, AAPL rallied approximately +59% between March and May. The gain in the STRIDES was almost proportional at +53%.

Given the group's strong fundamentals, tech should continue to rally as the economy improves. And so should those of the holders of STRIDES, ELKS, and CORTS. Given this backdrop, StreetAuthority editor Carla Pasternak hunted for tech bellwethers with CORTS, STRIDES and ELKS pegged to their common shares. In her latest issue of High-Yield Investing, Carla profiles nine ELKS, STRIDES, and CORTS all offering yields at 6.2% and higher. One is even pushing 12%! To learn the names of these securities, and to learn more about High-Yield Investing, please visit this link.

Want to answer more trivia questions? Visit our archives here!


 

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