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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.
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 -- income deposit securities (IDS's). The name might not sound very glamorous, but who cares when they offer juicy yields of up to 15.4%? The Perfect Successor to the Dying Canadian Trust IDS's 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 one of the market's best-performing sectors over the past ten years. But in just three 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. Income deposit 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. A Peculiar Stock/Bond Hybrid 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 income deposit securities
delivered yields of around 10%, then this would be sufficient to
overcome the skepticism that typically greets a new security. It has taken a few years, but income deposit securities are starting to receive some much-deserved attention from investors. And for good reason -- IDS's pay about DOUBLE the average yield on an investment-grade bond, and more than four times the average yield delivered by the S&P 500 Index. And high yields aren't the only attraction. As you can see in the table below, IDS's are also delivering impressive total returns . . .
The Best of Both Worlds . . . High Yields with Low Risk While many high-yield securities carry equally high risks, IDS's are special because their rich yields tend to be extremely safe. And for me, safety is of paramount importance. After all, like you, I too depend on income from my investment portfolio to help maintain my quality of life. That's why I seek out securities like IDS's that offer income investors like us the highest potential reward with relatively low risk. In order for a firm to issue an IDS, 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 IDS shares. 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. A Closer Look at My Favorite IDS's The long-term picture for IDS's 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 IDS's 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. And they haven't let me down. For example, the packaged food supplier I highlighted in the table above has been one of my top performers, delivering 8.8% dividends and total returns of +53.0% since April 2006. And going forward, this stock remains one of my favorite IDS's for today's market. I'm also bullish on a stable, well-entrenched bus manufacturer with dividends of 10.4%. If you want to enjoy a steady stream of worry-free dividends, then you need to learn more about these two securities. 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 IDS's) with extraordinarily high dividend yields. In recent issues, I've profiled some of the most attractive dividend payers on the market, including a diversified fund with a 23.1% yield, an equity-linked security paying 11.7%, a business development company with a 24.6% yield, and a real estate fund with dividends of 13.5%, among many others. If you'd like to learn the names of these companies -- plus receive a steady stream of stocks, funds, IDS's 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. Visit this link to learn more. Thanks for joining me on my search for today's highest-yielding securities!
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