Key Points
There's a new type of Strategy shares that trades with the ticker STRC.
The point of those shares is to offer monthly dividend income.
Its high yield is real, but there are a couple of non-obvious risks.
Strategy, (NASDAQ: MSTR) formerly known as MicroStrategy, is already renowned for creating the Bitcoin(CRYPTO: BTC) digital asset treasury playbook for public markets. Its newest and most-discussed instrument, Stretch (NASDAQ: STRC), is courting income-seeking investors. It pays out monthly, yields about 11.5% on an annualized basis, and it's engineered such that its price barely moves from its par of $100 per share -- all backed by Strategy's Bitcoin holdings.
In short, Stretch stitches together various features of bonds, money market funds, and Bitcoin exposure without precisely being any of them. Does that make it a smart purchase for dividend income or an alluring financial trap that's liable to leave you with losses?
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This is some impressive financial engineering
In technical terms, Stretch is a perpetual preferred stock issued by Strategy at $100 par. The company can adjust the dividend monthly within certain limits, and it's capped in how fast the dividend can fall. From Strategy's perspective, the goal is to steer the share price toward par. Below $100, the dividend yield goes up; at or above $100, it holds steady or drops.
But where does the cash to pay the dividend come from?
The model runs on continuous at-the-market (ATM) issuance of Stretch shares, backed by Strategy's treasury of 780,897 bitcoins. In other words, this is a Bitcoin accumulation engine for Strategy that's wearing income-product clothing from the perspective of investors. Strategy is effectively funneling yield-seeking capital into fresh Bitcoin purchases without diluting its common stock shareholders.
As an extension of that dynamic, if you're bullish on Bitcoin, it makes sense to believe that Stretch will be a stable monthly source of dividend income. It's also important to recognize that if you already hold Bitcoin or shares of Strategy (or one of its other classes of shares), buying Stretch could leave your portfolio a bit over-weighted on Bitcoin, which tends to be volatile.
Where it can bite you
There are a couple of problems to be aware of before buying Stretch and holding it for dividend income.
The first issue is inflation. Stretch has no dividend escalator clause. The dividend thus changes up or down to defend the price peg, not the purchasing power of the payout, so inflation is a double whammy which both erodes the real value of your $100 as well as the value of the dividend you receive. Thus the longer you hold this stock, the more problematic inflation will be.
The second risk is subtler. Stretch is not going to blow up or otherwise collapse at a specific Bitcoin price like some investors imagine. Strategy can easily cut the dividend or delay it without experiencing a traditional default on its debt. So if the price somehow slips below its par, new share issuance freezes, and you will then hold an asset paying less than what was originally advertised with a principal that may not recover soon or at all.
Is it a buy?
For a long-term investor trying to compound the value of their portfolio, Stretch is the wrong play. The par peg caps its upside at close to zero, there's no inflation adjustment for its dividend, and you're essentially volunteering to underwrite Strategy's digital asset treasury strategy wherein it accumulates Bitcoin via various forms of issuing debt and equity, and via financial engineering.
On the other hand, for a high-yield dividend income seeker with a somewhat shorter time horizon and clear eyes regarding the asset's risks and drawbacks, a small allocation is tenable, though simpler options exist. Portfolios of reliable monthly dividend paying stocks could deliver a similar stream of income.
If nothing else, Stretch is inventive. For most investors, it's also a bit more fragile and a bit more complex than its marketing suggests, which makes it closer to a trap than a durable income vehicle.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
