There are only eight of these securities in the world.
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
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
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
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
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
Whatever name you use, they're essentially the
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 this week on the search for the
world's best income opportunities!
-- Carla Pasternak
Global Dividend Opportunities
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S. This rare type of security is one of my
favorite investing ideas. I've been recommending one of
these enhanced income securities to my readers since 2006.
You can get the name of my favorite
EIS, plus the names of
seven others. All you have to do is
just go here.
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