Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earn High Yields On Stocks That Don't Pay Dividends

What if you could combine the pleasure of eating chocolate cake with the health benefits of eating vegetables? Or say I knew a way to get in great shape... without moving a muscle.

Well, unfortunately I don't. You still have get healthy by eating vegetables and exercising regularly. But I do know of something that combines the best of two worlds for income investors.

A financial innovation called STRIDES is making high income securities out of low-yielding growth stocks. As a result, you can earn a generous income stream while still participating in the appreciation potential of some of the world's greatest growth stars, even if they don't pay dividends at all.

What are STRIDES?
STRIDES, or STock Return Income DEbt Securities, are senior unsecured debt notes issued by Merrill Lynch that are linked to an underlying stock. The underlying company has nothing to do with the issuing of STRIDES, but their performance does determine how investors will profit. They've been issued for companies such as Oracle (Nasdaq: ORCL), Google (Nasdaq: GOOG), and Monsanto (NYSE: MON).

The special asset class is exciting for income investors because over their short, two year lifespan, these securities pay yields of up to 12% annually in interest. STRIDES convert into shares of the underlying security at maturity, so they allow you to not only earn a generous yield from low-paying companies -- but benefit from their growth at the same time.

Capital Appreciation from Growth Stocks... With High Yields
In addition to their hefty yields, STRIDES can offer significant appreciation potential. Since they convert into stock at a pre-determined ratio, their prices can soar if the underlying shares rally.

For example, say 9% Google STRIDES were issued at $25 each and make interest payments of $0.563 each quarter. Also assume that the Google STRIDES trade today at 8.6% and are convertible to 0.04949385 Google shares at maturity.

If Google stock trades at $569.96, the STRIDES are worth $28.21 ($569.96 x 0.04949385). But if Google were to rise to $650, the conversion ratio would mean the STRIDES would be worth $32 a note.

So not only do STRIDES enable investors earn a double-digit yield, but they get to also enjoy some of the upside of the underlying shares.

Downside Protection of Income Stocks
While STRIDES can offer a high yield and take advantage of rising share prices, they offer downside protection to boot. If the underlying stock price falls, so will the STRIDES -- but their high yields help cushion returns.

I don't want you to think that STRIDES are a risk-free investment. In fact, if the underlying shares fall too far, then investors will be saddled with shares at maturity that could be worth much less than the $25 par value of the STRIDES.

In addition, STRIDES are callable, so if the underlying shares rise too much, they are at risk of being called away. But with a guaranteed yield-to-call that is typically around 20%, your returns aren't likely to suffer much.

With this in mind, STRIDES are one of the most compelling new investments to come along in years. Income investors should be on the lookout to add this powerful tool to their investing arsenal.