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.
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.