Well, I might be exaggerating ever-so-slightly here, but - yes dear reader, it is shockingly true. Here are not just one but several securities that have a yield-to-maturity of around 9% in an institution that is effectively owned by the British tax-payer. How safe can you get, and how could you find a bigger return? Is this buried treasure or Fool's Gold?
I've underlined in a recent post that a high fixed yield today is usually worth more over the medium term than a lower, but growing yield - provided that the risk of losing your money is vanishingly low. The big problem with high-yield dividend shares is that dividend is not guaranteed - you have to accept the risk that dividends may not grow or may even be reduced. And that happens more often than we would like.
But the problem with high-yielding fixed yields, such as corporate bonds is that a high yield usually indicates a higher risk of default.
But buried in the wreckage that is Lloyds Banking Group - rescued by the UK Government - is an unusual class of securities Enhanced Capital Notes - there are about 20 different types, each with different maturities, coupons and yields.
To quote Collins Stewart:
- Enhanced Capital Notes (ECNs) are a form of contingent convertible issued by Lloyds Banking Group PLC. Holders of a number of existing Lloyds securities were offered the opportunity to convert their holdings into ECNs on a 1 for 1 basis. This followed a European Commission ruling that optional coupon payments should cease on existing securities whilst Lloyds was in receipt of state support. These dividend restrictions will last at least until February 2012."
In other words, this was a dodge to keep paying the coupon on the preference shares held mainly by the big financial institutions. And because they are no longer 'prefs', they are paid gross, without the UK's 10% dividend 'tax' (yes, I know, it's not really a tax...).
- If the Group s published consolidated core tier 1 ratio falls to less than 5 per cent, the ECNs automatically convert into Lloyds ordinary shares at a rate of 1.68892 ordinary shares per £1 of ECNs. This acts to increase Lloyds core tier 1 capital ratio at the time of conversion."
So have I convinced you? A guaranteed 9% yield? Or not?
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.