Have You Heard of 10%-Yielding Perpetual Cash Machines?

I’ve uncovered a small group of double-digit yielders that are so unusual nobody knows quite what to call them.

I’ve heard them called perpetual cash machines (PCM), income deposit securities (IDS), enhanced income securities (EIS) and income participating securities (IPS). I just call them “stapled products.”

Call them what you want. You can buy them through just about any brokerage… but you need to find them first. Only a handful — less than 10 — exist in the entire world.

What makes these securities so unique is they provide two separate sources of income stapled together. Typically, companies pair a high-yield bond with their common stock. In that case, the distribution comprises one part bond-interest income and one part common stock dividend. This gives you predictable bond payouts with potential equity appreciation.

The income is pretty hefty. The stapled securities I’ve found pay an average yield of 7-8%. The top one currently yields about 10%. That’s good in any environment, much less a nearly 0% interest rate economy.

So what’s behind the companies that issue these unique high-yield securities?

For a firm to issue a stapled product, it must generate a steady stream of regular annual cash flow. After all, it is expected to pay both regular interest on a bond and steady dividends. As a result, companies with unpredictable earnings and poor cash flow need not apply. Because cash flow must be stable, only steady companies in solid, non-volatile industries consider issuing shares.

The ones I’ve found come from a telecom in Alabama, a bus-maker from Canada and a hospital-owner with facilities in South Dakota and Oklahoma.

Now, I wouldn’t call stapled products risk-free — certainly, there’s no free lunch — but these securities have demonstrated above-average performance. 

In the past three years, for example, my perpetual cash machines have delivered average total returns of 14% annually, trouncing the S&P 500’s 1% average annual returns in the same period.

Past success is of course no guarantee of future performance, and some of these securities are more volatile than others, so you have to be selective.

Action to Take –> As a group, I count them as one of my favorite asset classes for the money they have made my loyal High-Yield Investing readers over the years and for the steady monthly or quarterly income they provide. [My research staff recently put together a report that covers perpetual cash machines/stapled products, including the gem yielding 10%. Get all the details here.]