George: ‘I found a stock that pays an 8% dividend. I am new to this. What is the difference between this type of security and a CD? (I am sure it’s not FDIC insured, but other than that.) The two I am referring to are called ‘quids’ – PGB and PEQ.’

☞ QUIDS are Quarterly Income Debt Securities, issued by many utility companies to cope with a changing environment (‘laughingly referred to as ‘deregulation,” reports the estimable Less Antman, ‘by people intent on blaming the free market for recent disastrous changes in government regulation of utilities’). Portland General Electric Company 8.25% (PGB) and Potomac Edison 8.00% (PEQ) are two examples.

They are shares of preferred stock that pay quarterly interest . . . unless the company wants to not pay dividends for a while, in which case it may defer them for up to five years (just tell your landlord to wait, ‘it’s coming’) . . . and that mature in 20 to 50 years . . . unless 8% turns out to be more than the company need pay to borrow, in which case, after five years, it can simply call in your shares and borrow someplace cheaper.

So you are on the hook to the utility for 20 to 50 years, but the utility is on the hook to you for no more than 5.

Of course, you can always get off the hook by selling your shares in the open market. But these shares are not likely to rise to much of a premium even if interest rates decline (buyers will know they can be called), and could fall to a major discount if the company got into trouble or if the general level of interest rates rose. (Why should anyone pay much for your rotten 8% when they can get, say, 10% down the street?)

What’s more, if the utility went bankrupt altogether, your claim would come after everyone else except the common shareholders. You might not get a dime.

So, no, they’re not CDs! And if you do buy them, and they do decide to defer interest payments for a few years, note that you may still have to pay taxes, currently, on the money you won’t receive until later.

And it’s not just QUIDS. All this is basically true of MIDS, MIPS, QUICS, QUIPS, TOPrS, and TruPS. The name for the entire group is FRCS (Fixed Rate Capital Securities). The pros who developed these, perhaps hoping to entice unsophisticated investors like George, may be known in some circles (suggests Less) as Promoters Routinely Inventing Confusing Securities.

 

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