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 typicaldividend payer in the S&P 500 pays a 2%dividend yield . But then there'smarket risk involved. For people who rely on a steadyincome stream, it's alot to have to submit to the whims of themarket 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 yourcapital and still offers a highly predictable income stream. But it can yield up to 600% more.
Icall thisinvestment a "CD Killer," but it's actually known by its more formal name: exchange-tradeddebt (ETD).
An ETD is a specialbond issued by a company to raise capital, except it's geared toward retail investors like you and me.
Unlike traditionalbonds , which are issued in units of $1,000 a piece and trade over-the-counter, ETD is typically issued as "seniornotes " in units of $25 and trade daily on the New YorkStock Exchange orNasdaq .
As with bonds orCDs , you get yourprincipal back atmaturity . So, if theface value of anote is $25, youwill 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 ( HTGC ) , a business development company I profiled in my High-YieldInvesting advisory in February. This company's ETD notes trade as Hercules Technology Growth Capital 7.00% Notes ( 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.
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 ofbankruptcy .
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 thecall 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'scoupon 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 thatoffer 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.