Money Buzz 02/05

Con Fusion

Mention hybrids today, and most people think cars, not securities. But the newest breed of products bearing the designation fuses elements of stocks and bonds rather than electricity and fuel.

Also known as income depositary securities (IDSs), hybrid securities offer investors the regular payment of a dividend-paying stock and some growth opportunity, as well as the interest payment of a fixed-income security. The investment structure is best suited to IPOs in certain sectors-such as the food and telecom industries-which have the steady cash flows to provide investors with regular payments, but not necessarily the high-growth prospects that a typical IPO offers.

Approved by the SEC last July, IDSs are expected to hit the market in full force this year. But while the opportunity for an income-generating security with a growth component has undeniable appeal, investment professionals advise weighing a company's growth prospects carefully before making the leap.

"Hybrids sound good at first, but because the underlying company is not really exciting, growth prospects for investors are not that great," cautions Susan B. Fulton, president of WealthTrust-FBB in Bethesda, Maryland. She says that the dividend-and-interest-payment combo also makes computing tax consequences a more complicated endeavor. Still, she adds, "income can be had for investors willing to put up with the tax complexities."

is a freelance writer in New York City specializing in business and finance.

This article was originally published in the February 2005 print edition of Entrepreneur with the headline: Money Buzz 02/05.