Dividend Enhanced Convertible Stock (DECS)

What Is Dividend Enhanced Convertible Stock (DECS)?

Dividend enhanced convertible stock (DECS) is a type of convertible preferred stock that furnishes the holder with premium dividends notwithstanding an embedded option for the holder to change over the shares into a fixed number of common shares after a foreordained date.

Most convertible preferred stock is traded at the request of the shareholder, yet some of the time there is a provision that permits the company, or issuer, to force the conversion. The value of a convertible preferred stock is eventually founded on the performance of the common stock.

Understanding Dividend Enhanced Convertible Stocks (DECS)

Dividend enhanced convertible stocks (DECS) commit the holder to change over their security into the underlying company's common stock at some later time. Therefore, DECS essentially function in basically the same manner to bonds that experience mandatory conversions to common stock eventually. A DECS' mandatory common stock conversion time span is represented by the company that issues the offering, notwithstanding, conversion normally happens inside a three to four-year span, following the underlying buy.

Dissimilar to traditional zero-coupon convertibles, DECS give an equity kicker and can be put to the issuer on certain dates, at prices mirroring the accumulation of the implied interest return. This put feature offers holders a measure of downside protection that limits a financial backer's likely losses. As such, the conversion comes at a foreordained fixed rate, and that conversion ratio starts to diminish once the price of the underlying shares arrives at a certain level. In any case, until that point, the conversion ratio is 1:1, and DECS shares might be issued at a similar market price as the underlying stock.

DECS and Other Convertible Preferreds

DECS are not by any means the only forward thinking convertible product that has come to market. Other comparative models include:

• Preferred Equity Redemption Cumulative Stocks (PERCS)
• Preferred Redeemable Increased Dividend Equity Security (PRIDES)
• Consequently Convertible Equity Securities (ACES)
• Structured Yield Product Exchangeable For Stock (STRYPES)

Every one of these hybridized models has its own set of unique risk and reward attributes. However, they share similar fundamental features, including an upside potential that is normally not exactly that of the underlying common stock, due to the way that convertible purchasers pay a premium for the privilege of changing over their shares, and they appreciate higher-than-market dividend rates.

DECS, as most tweaked hybrid convertible models, starting from various investment banks, which benefit from these instruments, on the grounds that dissimilar to pure debt issuances like corporate bonds mandatory convertibles don't represent a credit risk later for the company giving them, since they in the end convert to equity. Such convertibles likewise dispose of the descending pressure that a pure equity would place on the underlying stock, since they are not quickly changed over completely to common shares.

Features

• Dividend enhanced convertible stock (DECS) is a type of preferred shares that can be switched over completely to common stock at the proprietor's caution.
• When the common share trades over the conversion price, it very well might be advantageous for the preferred shareholders to switch their preferred stock over completely to common shares.
• DECS likewise pay a higher dividend to shareholders than ordinary preferreds.