Meet 'Stretch'—Michael Saylor's New Tool for Using Bitcoin to Pay a Big Dividend. Here's What to Know.

Key Takeaways

• Strategy’s new financial wares are something between a stock and a bond.
• The bitcoin buyer’s preferred issues pay dividends and resemble both stocks and bonds in different ways—and they’re attracting both retail and pro investors.

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If you can’t get enough volatility, buy bitcoin. If you’ve had enough… buy bitcoin.

That’s one way to read the good word from Michael Saylor, chair of Strategy (MSTR), whose latest financial wares, called preferred issues—hybrid securities that have both stock- and bond-like features—may appeal to both Wall Street and Main Street investors wary of whipsawing stock markets.

They look like bonds because they pay a regular yield, or dividend. They resemble equities because holders rank below creditors in a company’s capital stack. Four of them now trade on the Nasdaq, nicknamed “Stretch,” “Stride,” “Strife,” and “Strike” after their respective tickers. Stretch, which uses the symbol “STRC,” is the most ballyhooed of them all.

WHY THIS MATTERS TO YOU

Investors appear to be actively seeking income-generating assets lately. They might look for it in Strategy if they don’t mind the underlying crypto risk.

Why is that? Perhaps because its current yield is 11.5%—while Strategy’s common stock has been cut in half in the last year as crypto markets took a turn for the worse. (Stretch, Strategy’s Michael Saylor said on social media Tuesday, “is for everyone.”) Fans liken “Stretch” to a stablecoin, but investors should note some meaningful differences.

Like stablecoins, which aim to stay pegged to a fiat currency such as the U.S. dollar, Stretch is designed to trade at $100. Strategy does this by adjusting the rate it will pay on it up or down on a monthly basis; its current yield is higher than some “investment-grade” preferred issues that pay 6% to 7%.

Unlike stablecoins, Stretch is not as good as cash. Unlike Circle’s (CRCL) dollar-pegged USDC, it’s not backed by short-term Treasurys, which carry a guarantee from the U.S. government. Instead, it’s backed by Strategy itself, which includes a software business, a pile of bitcoin —738,731 coins recently valued at around $53 billion —and a cash reserve of over $2 billion the company said is intended to cover its debt and the preferred issues’ dividend but can be used for other things at Strategy’s discretion.

While Strategy’s common shares have at times been catnip for retail investors, the preferred issues, including Stretch, have been picked up by big institutional holders— including funds from Fidelity, Vanguard, Capital Group and BlackRock’s iShares— that aim to provide income, according to data compiled by Yahoo Finance.

The sale of the preferred issues raised $2.5 billion for Strategy in July and have raised hundreds of millions more this year via ongoing sales, allowing the company to keep buying bitcoin— but there’s risk. Strategy can change Stretch’s payout rate at its “sole and absolute discretion,” per the prospectus. It can issue other preferred stock that rank equally with STRC in the company’s ownership structure, which might be worrisome to those concerned about its ability to keep paying high yields. (Saylor told Investopedia in December that the company is building a “capital markets platform.”)

And there’s the possibility that even if Strategy raises the yield, it cannot keep the preferred at $100, and, per regulatory filings, “may abandon” the effort. If investors’ expectations about the yield aren’t met, they could react poorly. Per the company’s prospectus: “If we increase, or announce an intention to increase, the monthly regular dividend rate per annum, then the trading price of the STRC Stock may in fact decrease if the market expected us to make a larger increase.”

S&P Global in December affirmed Strategy’s credit rating of “B-” with a “stable outlook,” which means the firm expects Strategy will continue to manage its debt, continue paying preferred dividends, and maintain access to capital.

Strategy is incentivized to tread deliberately given how many institutional investors have bought in. And if bitcoin prices go higher, as they have lately, that could strengthen Strategy’s position as a stockpiler of the cryptocurrency—a good thing, though, preferred yields generally have an inverse relationship to risk.

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