Hybrids take the Crown for a gamble

You don't have to be in the same frame of mind as its guests to be tempted by Crown Casino's offer paying interest of 8.6 per cent a year. Though it would help.

At least you would instinctively know that it's somehow loaded in the house's favour.

One way or another, that's true of all hybrids - a cross between shares and bonds but with the worst of both.

They trade on the ASX, though you need to hold on to them until they mature or are redeemed to be sure of getting your money back, in return for which the interest drops at the worst time or might not even be paid when things are dire.

They've become popular because of falling rates on term deposits and extremely low yields on bonds. So far this year, $7.5 billion have been issued, each with a better yield, which knocks down the value of their predecessors.

Until recently, your typical hybrid was trading in the red; most of the earlier bank-issued ones still are.

Unfortunately they're no great shakes in difficult markets, which is when you need them. Both their prices and returns were dragged down during the GFC.

Hybrids count as prime capital so it's no surprise that the banks have been churning them out to those who think they're getting something safer than shares with a better income.

Don't think the issuer is doing you any favours just because hybrids pay 2 per cent or 3 per cent more than a term deposit. They're much riskier since there's no government guarantee, and only on a technicality are they marginally safer than shares. When push comes to shove, hybrids are just as dicey without any hope of a decent capital gain.

They can be non-cumulative, too - a fancy term for not paying up. So if an interest payment is missed for whatever reason there's no obligation to make it up later.

The Crown notes are cumulative, but there's a catch: interest can be postponed for up to five years.

All right, I'm being pernickety. So how about that 8.6 per cent, eh?

Well, it varies each quarter, but the 5 percentage points over the bank-bill rate makes it the jackpot of hybrids, so to speak.

APA Group and Caltex are offering a 4.5 per cent top-up, though the 0.5 per cent discount might be better value considering they don't stop paying just because of some mishap like too much debt.

The earliest these hybrids can mature is five to six years - the option is theirs, not yours - and by then, interest rates are likely to have risen, lifting the yield further.

Even so, compare them with CBA shares, which pay the same after the 30 per cent credit from franking. Over time, its dividend should grow, too, considering the bank makes a record profit every year.

Or there's Bendigo and Adelaide Bank yielding just under 11 per cent.

Follow David on Twitter @moneypotts