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Wednesday, April 17, 2013 - 11:30
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Friday, May 3, 2013 - 14:13
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Wednesday, April 17, 2013 - 11:30

Get Secure Yields Of Up To 7% With This 'CD Killer'

Wednesday, April 17, 2013 - 11:30am

The last time you could get a 7% yield from a CD was in the 1980s. Today, you'd be lucky to find a CD that pays more than 1.5%.

Stocks yield a bit more -- the typical dividend payer in the S&P 500 pays a 2% dividend yield. But then there's market risk involved. For people who rely on a steady income stream, it's a lot to have to submit to the whims of the market for a paltry 2%.

To be sure, low-risk yields of 5%, 6% or 7% are scarce. But there's one overlooked corner of the income universe that sports them in abundance.

It's like a CD -- it preserves your capital and still offers a highly predictable income stream. But it can yield up to 600% more.

I call this investment a "CD Killer," but it's actually known by its more formal name: exchange-traded debt (ETD).

An ETD is a special bond issued by a company to raise capital, except it's geared toward retail investors like you and me.

Unlike traditional bonds, which are issued in units of $1,000 a piece and trade over-the-counter, ETD is typically issued as "senior notes" in units of $25 and trade daily on the New York Stock Exchange or Nasdaq.

As with bonds or CDs, you get your principal back at maturity. So, if the face value of a note is $25, you will get that back when the ETD matures. Meanwhile, you collect interest payments quarterly, not just semi-annually as with traditional bonds.

Consider Hercules Technology Growth Capital (NYSE: HTGC), a business development company I profiled in my High-Yield Investing advisory in February. This company's ETD notes trade as Hercules Technology Growth Capital 7.00% Notes (NYSE: HTGY).

Hercules' ETD doles out a quarterly payment of about 44 cents per note, adding up to $1.75 per note annually. If you were to buy at the recent price of $25.82 per note, you would collect a current yield of 6.8% right now.

And unlike long-term bonds, which could be risky if interest rates start to rise, you don't have hold it forever to get that superior yield -- it matures in 2019.

Yields like these are not only triple what you can get from an average S&P 500 stock... They're also more secure.

You see, no payments can be made to common or preferred stockholders or junior debtholders until the company pays its ETD holders first. In fact, companies are legally obligated to pay interest and principal payments first, so ETD holders are at the top of the food chain even in the event of bankruptcy.

Of course, there are a few hitches, so you need to be selective when you buy an ETD.

As with traditional bonds, the notes can be "called" (or redeemed) before maturity. If you buy a note at $25.82 and it's redeemed at the face value of $25 on the call date (the first call date in this case is September 30, 2015), you will lose some of your principal investment. So you want to check that either the note is trading close to face value when you buy it or the call date is far enough out for quarterly interest payments to make up the difference.

Right now, Hercules' ETD trades at a slight premium to its face value, so you may want to wait until its price is closer to $25 before buying, as it could dampen your yield if the company decides to call the notes early. Essentially, the closer the price is to $25 when you buy notes, the closer your yield gets to 7% (which is the note's coupon rate).

But even if you did decide to buy this "CD Killer" at today's note price, its yield-to-call (the net yield you'd collect if Hercules decided to redeem the notes on the call date) is still a healthy 5%.

That still adds up to a 233% larger income stream than a CD paying 1.5%. And that's why I like to call this investment a "CD Killer."

Action to Take --> By doing your research and finding "CD Killer" investments that offer a far better income/risk proposition than what you would get with a traditional CD, bond or stock, you can beat the odds and be well on your way to collecting a comfortable retirement income.

P.S. -- Hercules' ETD is just one of several CD-killing investments that I'm researching. If you're looking for a smarter, safer and more profitable approach to income investing, then you need to see my latest research. These investments can hand you a "second income" 14 times larger than what CDs yield, seven times more than bonds, and three times more than brand-name Dow stocks. To learn more about them, go here.

Carla Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of HTGC in one or more of its “real money” portfolios.