STRK: High Yield Alternative To REITs, MLPs, And Dividend Stocks

Summary STRK offers steady income and share price appreciation, and is therefore a reasonable supplement to dividend stocks, REITs, MLPs, and ETFs like SCHD. STRK is heavily overcollateralized by Strategy’s Bitcoin holdings, making its risk quantifiable and hedgeable, unlike earnings-based dividend stocks. The market applies an excessive discount rate to STRK; actual risk is much lower, offering significant upside and an effective yield above 8%. The core thesis for why most dividend investors should seriously consider supplementing their REITs, MLPs, and dividend stock holdings with STRK is that STRK offers the same underlying features that dividend stocks offer but in a much better form with higher potential appreciation. Here are the features that dividend investors want: Steady income Share price appreciation As such, the following features make for a bad dividend investment (for the purposes of this article, I will just call distributions “dividends,” but of course they are different things): Income might ebb and flow with the economy Share or unit price gets damaged by a high dividend or distribution outflow Therefore, if we claim something is a viable alternative to dividend stocks, it must exemplify the first two features and have safeguards against the last two features. If I can show that Strategy Inc 8.00% Series A perpetual Strike preferred ( STRK ) fits these criteria, then I would have shown why it is a superior alternative. STRK is the first preferred stock that Strategy (formerly MicroStrategy) issued. It pays $8 per year, paid quarterly, on a $100 liquidation preference. The shares are also convertible to 0.1 shares of MSTR, Strategy’s class A common stock. This gives us the simple equation for valuing STRK: STRK Valuation = $8 per year cash flow + 0.1 MSTR At the current price of $96 per share of STRK and $336 per share of MSTR, we can use the formula to determine that the $8 perpetuity is valued at 96 - 33.6 = 62.4. We can then use the present value of a perpetuity formula to determine that the market is discounting the cash flows at 8 / 62.4 = 12.8% per year. To show why STRK is undervalued, we must show that STRK deserves a lower discount rate (which means that the $8 perpetuity is undervalued) and/ or that MSTR can go up (which means that the 0.1 MSTR component is undervalued). Why The 12.8% Discount Rate Should Be Much Lower STRK is overcollateralized 5.3x by Strategy’s massive Bitcoin ( BTC-USD ) holdings. This means that after deducting out the notional values for all the more senior instruments, the remaining BTC held by STRK must fall to less than a fifth of the current value because STRK investors cannot be paid back. That is an over 80% drop in the value of BTC. Strategy Credit (Strategy.com) Now, it is actually possible to get a pretty good estimate for the price the market pays for insuring damage beyond an 80% drawdown in BTC. You can look at the options market for BTC or IBIT puts whose strikes are 20% of the spot price. There’s two important things to note at this point. The first is that Strategy’s convertible bonds are mostly ITM. These will roll off the capital structure by converting into common equity. Michael Saylor has signaled in the Q2 2025 earnings call that the company will no longer issue convertible bonds. So the actual collateralization of STRK would be a lot higher since about $8.2 billion instruments will be gone after they all mature, and most if not all bonds will equitize without a cash expense. This fact would mean that we can look at puts that are much further OTM than 20% of the spot price, since it implies that BTC would need to fall far more than 80% before STRK investors are threatened. Strategy Debt (Strategy.com) The second fact is that in an actual liquidation, the more senior instruments would not be paid off using the current BTC prices but at severely depressed prices. This means that we’d have to redo the collateralization ratio at that later point in time, meaning the 5.3x collateralization overstates the safety. This fact would mean that we need to look at puts much closer to the money. Both facts are true and they impose opposite directional biases on our risk estimation. Thus we have to see which force should dominate. I will just be more conservative, largely for the sake of argument, and look at hedges for a less than 80% drawdown. Let’s assume a 50% drawdown is where STRK investors will start to suffer. IBIT currently trades at $64 and the 32 strike put option expiring in 848 days trades at $3.50. This means that to insure against a greater than 50% drawdown in BTC over the next 2.3 years, I only have to pay 3.5/32 = 10.9% of the value I’m insuring (again, this would be at the 50% drawdown point). IBIT options (tradingview) 10.9% paid over 2.3 years is an annualized yield of 4.7%. In other words, the cost to fully erase the BTC price risk for this 12.8% discount rate instrument is to pay 4.7%. Now, please understand that a discount rate is applied to compensate for the risk of an instrument. So the market price of STRK is communicating a 12.8% discount rate. But the options market for BTC says that 4.7% is enough to erase all the price risk. The only other risks here would be execution risks. If Strategy somehow loses its BTC holdings due to technical errors, then this is an execution risk that the additional 8.1% excess to the BTC price risk is effectively compensating for. However, consider that Strategy uses extremely reputable custodians for its BTC, which is pretty much the same situation as IBIT (IBIT uses Coinbase). The other execution risk is Strategy somehow messes up its capital structure. Perhaps it issues a lot of more senior instruments over the next two years, and therefore destroys the collateral ratio on STRK. This is possible. But I just don’t see this justifying an 8.1% excess. Every investor has to do the math for themselves, but personally I think 12.8% is much too high. The Case For MSTR Going Up I think we can safely assume that as long as BTC goes up over a longer time horizon, MSTR will go up too. The company is slightly leveraged BTC because it has $14 billion of debt and preferred instruments against an asset base of $70 billion in BTC. The convertible bonds have an effective cost of capital of near 0% at this point and the preferred equities have a cost of capital around 12%. If you think BTC will have a long term CAGR higher than these levels, then you’d expect the equity value of MSTR to increase over time, since the equity holders would be earning the spread between the ROIC of BTC and the cost of capital to buy the BTC. Because STRK contains 0.1 MSTR, an increase in MSTR means that the second component of STRK in the aforementioned STRK valuation equation is going up. So will BTC go up? Many books have been written about this topic. The quick answer is a very likely yes. This is because BTC is a scarce and neutral asset. It is like gold in this sense. Yet, it is endlessly divisible and instantly transportable without the need for IOUs, like fiat currency. It also lacks the common risks which plague corporations such as: natural disasters, management incompetency, bad jurisdictions or laws, competition, stagnation, etc. If these qualities are desirable to people, then BTC will very likely go up over time, and so will MSTR. Currently, MSTR trades at 1.55x its BTC holdings. It has already increased BTC per share by 25% since the start of 2025. To tie it back to the original statements of dividend investor preferences: The income consistency is safely addressed by the $8 perpetuity being overcollateralized and getting tagged with a demonstrably high discount rate The share price appreciation is addressed by the 0.1 MSTR component of STRK, which grows as the value of BTC increases To address the two features that dividend investors dislike: The income does not ebb and flow with the economy, because the collateralization remains unless BTC collapses completely. BTC is a macro asset (historically it moves with liquidity and rates) and so the exact extent of overcollateralization may change, but it will not change the actual income being received. The income cuts into the share price, but there’s an entirely unrelated component of the share price that is purely due to MSTR and BTC price appreciation. This carries the share price appreciation of STRK, even while the dividend is regularly paid. Is STRK Superior To Other Dividend Stocks? I believe STRK can be considered superior to other dividend stocks because the design is simple and so the risks are very visible and quantifiable. You cannot really say this for other dividend stocks. Idiosyncratic risks at the firm level are mitigated via broad baskets of equities. This is offered by ETFs like SCHD. But even so, that value is based on future earnings which may or may not materialize. The difference with STRK is that its value is based on assets which Strategy currently owns. The asset is demonstrably 5.3x collateralized at this very moment in time. At any moment in time, we can know the exact collateralization and the exact price risk. Since it is all based on a single asset with a highly liquid derivatives market, we can also use hedges to perfectly remove the price risk altogether. A while ago, I wrote the following in a tweet explaining why over-collateralized fixed income is superior to earnings-based fixed income: You can calculate the exact risk at any moment. You know the senior obligations, the bitcoin price, the treasury size, and the capital stack. That means you can compute the exact price of bitcoin when your income gets threatened. You can get insurance at those exact points, and therefore very precisely hedge out the risk via derivatives. You obviously cannot do this with earnings-based fixed income. There are no direct "earnings derivatives". You might use the common stock's options, but these are a couple layers removed from your actual risk factor of earnings. Also, companies which issue preferred stock tend to have illiquid options, making the cost of hedging even higher. In short: All overcollateralized fixed income risk is contained within the collateral. And the collateral's risk is known and transferrable. In contrast, all earnings-based fixed income risk is contained within the earnings. And this risk is unknown and untransferable. The same logic applies to dividend stocks. The dividend from a normal dividend stock is ultimately derived from future earnings. This is an unquantifiable risk with unknown unknowns. While there is risk in BTC, the precise price risk in the case of STRK is quantifiable and more importantly, transferable via liquid options markets. The ability to surgically isolate the price risk makes STRK very compelling and puts it at a different level from normal dividend stocks. Who Is STRK For? It’s important to note that STRK is not for people who are bullish on BTC . If someone is truly bullish on BTC, then they should just buy BTC. At the current price, STRK is for income investors who simply think that BTC will stick around and steadily increase over time, even if it doesn’t outperform equities like it used to. Specifically, as long as BTC can appreciate at an average of 8% per year, then the dividend is fully covered by the growth of Strategy’s holdings and the collateralization ratio wouldn’t change, assuming all else is held equal. 8% is a fairly low bar considering that this has been roughly the growth rate of the money supply over the last ten years. The S&P 500 and gold have far outperformed 8% over the last few years. Even if BTC’s growth rate lags these assets by a hundred or so basis points, the extent of the overcollateralization ensures that there is sufficient coverage for the dividend. Risk The risk of STRK is in BTC and in Strategy's execution. If BTC goes to 0, then there is no more yield. If you don’t have at least a neutral outlook on BTC, then STRK will not be for you. If you think BTC will at least stick around for years to come, then STRK at current prices is worth serious investment consideration. If BTC falls 50%, then MSTR will probably have a much larger drawdown. Right now, exactly $34 of the total $96 STRK share price is attributable to MSTR. This means that a dip in MSTR can affect only about 35% of STRK’s share price. Based on the overcollateralization, we’ve established that an 80% drop would be required to jeopardize STRK based on its notional value (and therefore dividends). And based on the market prices of IBIT puts, we’ve seen that it is trivial to hedge against such crashes in the BTC price, for far less than what the dividends pay. Hence you can think about the risk of a BTC crash to STRK by thinking about a buffered loss position. If BTC falls by just 50%, the $8 dividend remains extremely safe but the price of STRK that comes from MSTR convertibility will fall, although this will lead to no more than a 35% drawdown (35% would be if MSTR went to 0, which is a very extreme scenario). If BTC falls by over 80%, then it is very likely that MSTR will shrink to a very small number while the dividend starts to become more jeopardized. Therefore, STRK is a buffered loss position where if BTC falls by a big number, then STRK won’t suffer nearly as much and the dividend won’t suffer at all. Yet, if BTC falls by a catastrophic number (lets say it goes down 99%), then STRK would go to 0 because the convertibility to MSTR would be worthless and the dividend would be gone too. This buffered loss risk profile is exactly why STRK is not for folks who think BTC is doomed, but very viable for folks who think BTC will stick around. Strategy can also have execution mistakes. I think this is unlikely because they pay close attention to their risks and have clearly thought deeply about the implications of their credit instruments, going as far as to create a live dashboard quantifying the precise risks. The one risk I think is invalid which gets cited often is that Strategy is a ponzi scheme because it must raise more capital to pay the dividends on its preferred shares. This is not true. Strategy only chooses to raise more capital by issuing common equity. It has every option to sell some BTC to pay the dividend, because—as I’ve made abundantly clear—the preferred securities are heavily overcollateralized with assets! However, when the common stock trades at a premium to the underlying BTC, it just makes more sense to sell the common stock to capture that premium in the process. If the common stock traded at a discount to the underlying BTC, then it may make sense to sell BTC to pay dividends, but we’ll likely see the company use other preferred instruments to do so, waiting for the common equity to recover to a premium. Either way, the fact that the company has the option to sell just some of its assets to fund all its liabilities many times over means that there is no situation where a continuous inflow of new investors is essential to the model. Thus, Strategy simply does not meet the definition of a ponzi scheme. Conclusion I’ve laid out the risks of STRK and thoughts about why it is a great alternative for dividend investors. I believe that the market is applying a disproportionately high discount rate to the security. I also believe the market is yet to catch on to the real benefit of fixed income instruments that are backed by present collateral rather than future earnings. Finally, I believe the convertibility into MSTR gives STRK a very compelling thesis for price appreciation. All of these things indicate that STRK is a highly undervalued asset. Priced with a better discount rate of 8% instead of the current 12.8%, we would get a present value of perpetuity of $100 ($8/8%=$100). The 0.1 MSTR convertibility means that a price target of $134 per share is reasonable at today’s market conditions. Therefore, STRK at $96 is a Buy with almost 40% price appreciation upside and the opportunity to lock in an effective yield of over 8%.