Saturday, December 17, 2005

BEYOND THE BASICS: INCOME DEPOSIT SECURITIES (IDS)
THIS TOPIC IS AN ADVANCED SUBJECT BEYOND THE BASIC LEVEL TO BE GENERALLY COVERED IN THE "MILLIONAIRE CLASS". BECAUSE OF A PARTICULAR INTEREST IT IS BEING COVERED AT THIS TIME AND SHOULD BE DISREGARDED BY NOVICES.

13% INCOME- GOT YOUR INTEREST? INCOME DEPOSIT SECURITIES (IDS) ARE UNITS THAT INSTEAD OF TRADING ON A COMPANY'S GROWTH PROSPECTS ARE VALUED ON THE CONSISTENCY OF THEIR CASH FLOW. THOSE CASH FLOWS ARE NEARLY ALL PAID TO SHAREHOLDERS IN THE FORM OF DIVIDEND AND BOND INTEREST PAYMENTS. ANNUAL YIELDS OF 8% TO 15% WILL ATTRACT INVESTORS HUNGRY FOR DIVIDENDS IN THE WAKE OF THE DIVIDEND TAX ROLLBACK.

"INCOME DEPOSIT SECURITIES" (IDS) ARE A HYBRID SECURITY THAT MARRIES A COMMON STOCK AND A BOND, THEY ARE ALSO CALLED "INCOME PARTICIPATION SECURITIES" (IPS) OR "ENHANCED INCOME SECURITIES" (EIS). THEY ARE A COMMON TYPE OF SECURITY IN CANADA BUT NOT IN THE U.S. STOCK MARKETS. THEY WERE INTRODUCED IN THE U.S. IN 2004 BUT DID NOT FIND MUCH INTEREST BY INVESTORS BECAUSE OF THEIR ODD NATURE AND MOST OFFERINGS BY COMPANIES WERE WITHDRAWN. AS OF DECEMBER 2005 THERE ARE ONLY FOUR COMPANIES LISTED ON THE AMERICAN STOCK EXCHANGE; MOST HAVE BEEN TRADING FOR OVER A YEAR. THERE IS LIGHT TRADING IN THE SECURITIES, FROM 30,000 TO 90,000 SHARES A DAY. THEY ARE CENTERPLATE (CVP), B&G FOODS (BGF), COINMARCH (DRY) AND OTELCO (OTT).

WHY CONSIDER THEM? HIGH INCOME IS THE ANSWER. AS OF DECEMBER 2005 THEY ALL PROVIDE A RETURN OF 10% TO 13% PER ANNUM(YEAR). IN OTHER WORDS $1,000 INVESTED WILL RECEIVE $100 OF INCOME FOR THE YEAR IF THE RATE IS 10%. THEY ARE CASH COWS THAT PROVIDE A DEPENDABLE LEVEL OF HIGH INCOME FOR INCOME INVESTORS.

WITH HIGH INCOME COMES RISK. HOW MUCH RISK? THAT IS THE TOUGH QUESTION. THESE ARE ALL STABLE COMPANIES (ONE COULD CALL THEM BORING) WITH A WELL DEFINED MARKET FOR THEIR PRODUCT, PREDICTABLE AND STABLE CASH FLOW, LIMITED NEEDS FOR CAPITAL EXPENDITURES AND MODEST GROWTH POTENTIAL. THE MAJOR RISK IS THAT THE COMPANY WILL FAIL TO PAY THE DIVIDENDS AND INTEREST THAT ARE DUE ON THE SECURITIES DUE TO DECLINING BUSINESS PROSPECTS OR THE COMPANY'S INCOMING CASH FLOW DRYING UP. IF DIVIDEND AND INTEREST PAYMENTS ARE NOT MADE THE VALUE OF THE COMPANYS STOCK WOULD ALSO PLUNGE.

AT THIS POINT IN TIME, DECEMBER 2005, MOST OF THESE COMPANIES' STOCKS ARE TRADING SOMEWHAT ABOVE THEIR AVERAGES FOR THE LAST YEAR AND THE VOLUME OF SHARES TRADING IS INCREASING. IN AT LEAST ONE INSTANCE, CENTERPLATE, ANOTHER COMPANY HAS MADE AN OFFER, SINCE REJECTED BY CENTERPLATE, TO PURCHASE ALL THEIR STOCK AT $12.50 A SHARE ; THIS WOULD SEEM TO PUT A FLOOR VALUE OF THE STOCK IN ABOUT THAT RANGE. IT IS RUMORED THAT FOR ANOTHER COMPANY INSTITUTIONS (OTHER COMPANIES, FUNDS, OR INSIDERS) HAVE BEEN ACCUMULATING SHARES ON THE OPEN MARKET. MY VIEW IS THAT THE MAJOR RISK LIES IN INTEREST RATES IN GENERAL; IF GENERAL INTEREST RATES MOVE UP SHARPLY THE STOCKS PRICES WOULD DECLINE, AS WOULD ALL BONDS. (THIS IS NOT THE PLACE TO DISCUSS INTEREST RATE MOVEMENT AND ITS EFFECTS ON EQUITY AND BOND PRICES. THAT IS FOR ANOTHER DAY.) THE OTHER DRAG ON STOCK VALUE IS THE FACT THAT THERE ARE ONLY FOUR OF THESE SECURITIES AND THEY ARE POORLY UNDERSTOOD BY MOST MARKET PARTICIPANTS. IT IS NOT WORTH ANYONE'S TIME TO TOUT THESE STOCKS BECAUSE THERE IS NO "BIG MONEY" TO BE MADE IN MANIPULATING THEM. TO SUMMARIZE, MY VIEW IS THAT THE INCOME FROM ALL OF THESE SECURITIES IS SAFE AND WILL NOT BE DEFAULTED UPON, AND THEIR STOCKS WILL CONTINUE TO TRADE IN A FAIRLY NARROW RANGE. THEY WILL NOT GO UP OR DOWN DRAMATICALLY.

SECURITY DESCRIPTION: THE INCOME DEPOSIT SECUITY(IDS) IS A COMBINATION OF A SHARE OF COMMON STOCK AND SUBORDINATED DEBENTURE (BOND FOR OUR DISCUSSION) THAT PAYS A SET DIVIDEND ON THE COMMON STOCK AND A SET RATE OF INTEREST ON THE DEBENTURE. FOR EXAMPLE: COINMARCH PAYS A DIVIDEND OF .206 EACH QUARTER(3 MONTHS) ON THE COMMON STOCK PORTION OF THE SECURITY AND, ALSO, PAYS INTEREST OF .169 ON THE DEBENTURE PORTION OF THE SECURITY. THIS IS .375 EVERY QUARTER OR $1.50 TOTAL FOR THE YEAR. AS OF DECEMBER 16, 2005 THE SECURITY WAS LISTED AT $15.00 WHICH MEANS THE SHAREHOLDER IS GETTING 10% PER ANNUM ($1.50 DIVIDED BY $15.00 = 10%). THIS IS THE RETURN AN INVESTOR, WHO PURCHASED A SHARE TODAY, WOULD GET AS LONG AS THE SECURITY WAS HELD REGARDLESS OF THE SECURITY PRICE GOING UP OR DOWN AFTER THE DATE OF PURCHASE. WHEN THE SECURITY IS EVENTUALLY SOLD IT WOULD BE AT THE MARKET PRICE ON THAT DAY WHICH COULD BE HIGHER OR LOWER THAN THE ORIGINAL PURCHASE PRICE BUT WE ARE LOOKING FOR THESE SECURITIES TO TRADE IN A VERY NARROW RANGE.

WHO ARE THEY?
B&G FOODS(BGF) OWNS AMONG OTHERS ORTEGA FOODS; IT PRODUCE BASIC FOODS AND SAUCES IN A STEADY BUT SLOW GROWING MARKET. STATED DIVIDEND OF .85 AND INTEREST OF .85 FOR A TOTAL PAYMENT OF $1.70 YEAR. AT $14.96(12/17/05) A SHARE THAT IS A ANNUAL YIELD OF 13.636% ($1.70 DIVIDED BY $14.96 = 13.636%) . THE PAYMENTS ARE MADE QUARTERLY.

CENTERPLATE(CVP) HAS THE FOOD CONCESSIONS AT MANY SPORTS AND ENTERTAINMENT STADIUMS. STATED DIVIDEND OF .78 AND INTEREST OF .78 FOR A TOTAL PAYMENT OF $1.56 A YEAR. AT $12.34 (12/16/05)A SHARE THAT IS AN ANNUAL YIELD OF 12.64%. THE PAYMENTS ARE MADE MONTHLY.

COINMARCH(DRY) PROVIDES COIN OPERATED WASHING MACHINES IN DORMITORIES AND APARTMENT BUILDINGS. STATED DIVIDEND OF.824 AND INTEREST OF .676 FOR A TOTAL PAYMENT OF $1.50 YEAR. AT $15.00(12/16/05) A SHARE THAT IS AN ANNUAL YIELD OF 10%. THE PAYMENTS ARE MADE QUARTERLY.

OTELCO(OTT) SOLE LOCAL TELEPHONE OPERATOR IN SEVERAL RURAL AREAS. STATED DIVIDEND OF .705 AND INTEREST OF .975 FOR A TOTAL OF $1.68 A YEAR. AT $16.00(12/16/05) A SHARE THAT IS AN ANNUAL RATE OF 10.5%. THE PAYMENTS ARE MADE QUARTERLY.

DUE TO THEIR ATTACTIVE YIELDS IDS UNITS ARE WORTH CONSIDERING IN A INCOME PORTFOLIO AS A REPLACEMENT FOR HIGH YIELD(JUNK) BONDS AND HIGH DIVIDEND STOCKS. BECAUSE OF THEIR UNSEASONED NATURE, BEING IN EXISTENCE FOR LESS THAN 2 YEARS, THEY SHOULD CONSTITUTE A LIMITED PORTION OF ANY PORTFOLIO BUT THEY SHOULD NOT BE OVERLOOKED AS A MEANS OF GENERATING HIGH INCOME AT MODERATE RISK.