It's hard not to be tempted by an 8% yield. That's what your broker will be counting on when he tries to sell you a type of preferred stock - called monthly income preferred securities or MIPS - designed to let companies take a special tax break not available with regular preferred stock.

Here's how it works: A company that wants to issue MIPS sets up a special partnership. This partnership takes investors' money and lends it to the parent company. Then the company pays interest on the debt. The partnership uses that interest to pay investors their dividends.

It's a bit complicated, we know, but what it boils down to is this: A company treats MIPS as debt for tax purposes and - at the same time - as equity on the corporate balance sheet. In other words, this new Wall Street creation allows a company to take on a liability and dress it up to look like an asset! Debt is debt and equity is equity in our book and no fancy bookkeeping can change that.

Even the rating services (like S&P and Moody's) will be hard-pressed to tell this hidden debt from equity, so debt-laden corporations may get higher ratings than they deserve. This could be the start of "stealth" corporate bankruptcies that leave MIPS investors shell-shocked and empty-handed.

Here are a few other reasons you should avoid this Wall Street "invention":

 

• If a company gets into financial trouble, it can defer payments on MIPS for as long as five years.

 

 

• MIPS have more downside potential than upside potential. A company can redeem MIPS in five years but doesn't have to guarantee the price at which they redeem them.

   

 

• MIPS move in tandem with bonds, so a rise in interest rates can equal a loss.

   

 

• MIPS dividends must be reported on partnership tax forms, known as K-1s, so investors don't get 1099-DW statements. This makes filing your taxes more difficult and - since you will probably need an accountant - more costly.

   

If you want the higher yields and the chance for capital appreciation offered by preferred stocks, then just buy regular preferred stock. No need to get more complicated than that.

For more investing wisely advice, click below:

 

• Don't Lose Your Shirt in These Investments
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• Beware Buying on Margin