The Perfect Successor to the Dying Canadian Trust
A Peculiar Stock/Bond Hybrid
The Best of Both Worlds ... High Yields with Low Risk
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Note from Cabot Wealth Advisory Editor Elyse Andrews: It was greeted as “an oddball security from Canada” when it debuted in December 2003. But investors have been warming up to this special type of security in difficult times. Today, we’re featuring this income-investing article from our friends at StreetAuthority. StreetAuthority editor Carla Pasternak explains how to capture a 16% yield from a special Canadian security. After all, Carla reports that it pays five times the average yield delivered by the S&P 500 Index--while offering the safety of a bond with the upside of an equity.
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It was greeted as “an oddball security from Canada” when it debuted in December 2003.
Wall Street pundit Richard Steinberg compared this new security to “the roach motel where you check in, but you can’t check out.” Steinberg thought investors wouldn’t be able to easily trade this new type of security since it was so different, and people at the time were still favoring growth over yield.
Fortunately, not all portfolio managers sang the same tune.
Bill Shrier of CIBC World Markets, the firm that helped launch the very first of these unusual securities, predicted their yield would “beat the pants off” of just about any other investment.
I’m speaking about one of the newest (and most lucrative) asset classes to hit Wall Street in recent years--enhanced income securities (EIS). The name might not sound very glamorous, but who cares when they offer juicy average yields of 16%?
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EISs are really Canadian income trusts in disguise, efficiently distributing a company’s cash flows to shareholders. Canadian investment banks designed them specifically for U.S. companies seeking an income trust structure better suited to American tax laws.
As you may know, Canadian trusts have been a staple of many income investors’ portfolios for years. But in just two years we can kiss our favorite trusts goodbye. Thanks to the Canadian government’s decision to tax them like corporations starting in 2011, their double-digit yields will become a thing of the past.
Not to worry. Enhanced income securities can fill up the slack--they’re as close to Canadian trusts as hot chocolate is to cocoa, but they likely won’t face the same onerous tax penalties in the coming years.
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Top High-Yield Pick for 2009 Now Yields 33.1%
Thanks to the market’s recent implosion, one of StreetAuthority’s all-time favorite investments is now paying a hefty 33.1% dividend yield. In fact, the level of payout is so high, your initial investment could easily DOUBLE in less than 2 1/2 years.
And there’s dozens more where this one came from. Stunning yields like this are growing more and more common ... if you know where to look for them. In StreetAuthority’s just released, 7-volume investor’s library you’ll find dozens of safe, low-risk stocks throwing off yields of 20.2% ... 22.4% ... 29.0% and more!
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http://www.streetauthority.com/p/hy/2009/wi-report-b-market-implosion.asp?TC=HY0212
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What makes income deposit securities so unique is that they are comprised of one share of common stock and one high-yield bond. In other words, about half of the yield comes from common share dividends that can grow with the company’s cash flow. The rest comes from a high-yield bond that pays you virtually guaranteed income.
Bill Shrier and others argued that if enhanced income securities delivered yields of around 10%, then this would be sufficient to overcome the skepticism that typically greets a new security.
He was right.
It has taken a few years, but enhanced income securities are starting to receive some much-deserved attention from investors. And for good reason--many pay more than DOUBLE the average yield on an “A"-rated bond, and five times the average yield delivered by the S&P 500 Index.
As you can see, the yields associated with these securities are nothing short of phenomenal ...
Power-generation corporation: 12.3% dividend yield
Packaged-foods maker: 14.2% dividend yield
Hospital owner: 13.4% dividend yield
Bus manufacturer: 11.3% dividend yield
Telecom company: 18.7% dividend yield
Average dividend yield: 16.0%
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While many high-yield securities carry equally high risks, EISs are special because their rich yields are buoyed by the bond portion of the security. And for me, this is of paramount importance. After all, it’s not often investors can count on enjoying high yields from investment-grade bonds while also having the upside of an equity. That’s why I seek out securities like EISs that offer income investors like us the highest potential reward with relatively low risk.
In order for a firm to issue an EIS, it must generate a steady stream of regular annual cash flows. After all, income deposit securities are expected to pay both regular interest on a bond and steady dividends. As a result, those companies with unpredictable earnings and poor cash flows need not apply. Since cash flows must be stable, only steady companies in solid, predictable industries issue the securities.
These companies run the gamut from school buses and hospitals to funeral homes and recycling plants. Whatever their focus, all of them are in recession-proof businesses that throw off piles of free cash flow, even in a slowing economy. And they all pass along the lion’s share of that cash flow to investors by paying abnormally high dividends.
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The long-term picture for EISs looks bright, especially in today’s volatile market environment. The U.S. economy has ground to a halt, and many investors are looking for a stable place to invest while the current market turmoil ravishes portfolios here and abroad. This spells high times for income deposit securities.
Because only a handful of companies have issued EISs in the U.S., this unusual asset class has been largely overlooked. But I first called attention to these high-yield gems over a year ago in the pages of my premium newsletter--High-Yield Investing. In fact, I liked them so much so that I added three of these securities to my model income portfolios.
For example, the packaged-food maker I highlighted above has been a top performer, delivering a 14.2% yield and beating the S&P 500 by 30 percentage points over the last three years. And going forward, this remains one of my favorite EISs for today’s market. I’m also bullish on a stable, well-entrenched bus manufacturer with dividends of 11.3%.
Thanks for joining me on my search for today’s highest-yielding securities!
Sincerely,
Carla Pasternak
Editor of StreetAuthority’s High-Yield Investing
Editor’s Note: If you want to enjoy a steady stream of worry-free dividends, then you need to learn more about the two securities discussed above. That’s where my premium newsletter--High-Yield Investing--comes in. It’s the only newsletter of its kind devoted exclusively to finding safe, stable investments (like EISs) with extraordinarily high dividend yields.
In recent issues, I’ve profiled some of the most attractive dividend payers on the market, including an infrastructure and utilities fund with a 23.6% yield, an equity-linked security paying 9.6%, an MLP paying a 16.5% yield and a real estate fund with dividends of 11.0%, among many others.
If you’d like to learn the names of these companies--plus receive a steady stream of stocks, funds, EISs and other investing ideas with abnormally high dividend yields each and every month--then I’d like to extend you a personal invitation to try my premium income investing newsletter ... High-Yield Investing. Click the link below to learn more.
http://www.streetauthority.com/p/hy/2009/02-09-eis.asp?TC=HY0211
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