Now that 0% interest rates are a thing of the past, bonds finally pay a decent amount of interest. And with the markets predicting rate cuts in 2024, you have a very good chance of earning a strong return on bonds, as their prices will rise if rates fall.

But I have a big problem with the bond industry.

It’s the way most investors buy bonds: bond funds. Since bond prices move in the opposite direction of interest rates, bond funds work well when rates are falling and the prices of the bonds in their portfolios are rising. But when rates rise, those same bonds fall in price and investors get crushed.

For example, the largest bond fund, the Vanguard Total Bond Market ETF (Nasdaq: BND), dropped from a high of $75 to $68 last year before bouncing in October as the markets began to believe rates had topped out. That’s a drop of more than 9%.

The iShares Core U.S. Aggregate Bond ETF (NYSE: AGG), another large bond fund, fell 9.5% from high to low last year.

Both of these exchange-traded funds (ETFs) are still below where they were a year ago.

The two funds have more than $200 billion in combined assets. That’s a lot of money that retail investors shelled out because they thought bonds were safe.

The thing is, bonds are safe… if you buy individual bonds rather than a fund or ETF.

When you buy a bond fund or ETF, you are at the mercy of the fund manager or the index that the bond is tied to. And if you want to withdraw some funds, you’d better pray that the price is higher than it was when you bought it. Otherwise, you’ll end up taking a loss.

But when you own individual bonds, you’re able to plan accordingly so you know when your cash will become available. If you needed your funds in October 2026, for example, you would buy an individual bond that matures before then.

Best of all, you know that at maturity, each bond is going to be worth par value (which is $1,000) no matter where it traded in the past. At maturity, you will receive $1,000 unless the company has gone bankrupt – which is extremely unlikely unless you’re buying the riskiest of bonds.

If you were to buy the iShares bond ETF I mentioned above, the price could be anywhere by October 2026. It could be at $98, which is where it’s at as I write, or it could be at $105 or $80. If you buy it at $98 and it’s at $80 when you need the money, you’ll collect only $800 for every $980 you invested.

Meanwhile, if you buy a bond that matures in October 2026 for $980 today, you will receive $1,000 in October 2026 – plus you’ll have collected interest along the way.

Wall Street makes it very easy to buy bond funds or ETFs. Buying them is just like buying stocks. It’s about as simple a process as there is.

Buying a bond is a little – but just a little – more complicated. Sometimes, there is no market for a particular bond, meaning your broker will have to work to find a buyer or seller for you. If they can’t, you won’t be able to make the transaction. For that reason, you should only buy bonds you intend to hold until maturity.

If the bond’s price climbs or you want to sell for another reason, you likely will be able to, but unlike with stocks, ETFs and mutual funds, there’s no guarantee there will be a buyer.

You can always call the fixed income desk at your broker if you ever get stuck or have questions. Most fixed income desks have very good customer service, as the representatives are usually bond specialists.

Individual bonds provide income and safety for your portfolio. Bond funds produce income only. There is no assurance that you will ever get your money back from a bond fund.

Stick with individual bonds for the fixed income part of your portfolio.

The post The Big Problem With the Bond Market appeared first on Wealthy Retirement.

Most investors should own some in their portfolio to help ride out tough stock markets – like the one we’re currently in – because bonds provide some ballast and safety.

Bonds have a par value of $1,000. The only way you won’t get paid $1,000 at maturity is if the company declares bankruptcy. Otherwise, no matter what is going on in the markets or the economy, you’ll get paid $1,000 per bond at maturity.

Now that interest rates have climbed up off the floor, bond investors can finally earn some real yield.

You can earn 5.5% by owning investment-grade bonds that mature in two years. Or 4.6% in a tax-free municipal bond with the same maturity. That’s a taxable equivalent of more than 6% if you’re in the 32% tax bracket.

And as the Fed continues to raise interest rates to fight off inflation, the yields should get even better.

Not only will you earn strong yields for the first time in years, but those bonds should increase in price once the Fed stops raising rates and starts lowering them.

Bond prices move in the opposite direction of interest rates.

It makes sense when you think about it.

If you can buy a bond for par value ($1,000) that yields 5%, when interest rates rise, no one will buy the bond that yields 5% if they can get a similar new bond that yields 5.5% because interest rates just went up.

So in order for that 5% bond to be able to be sold, the price has to come down to push the yield higher.

A bond with a 5% coupon pays out $50 per year ($1,000 x 5%, or 0.05 = $50). But you can’t just raise the interest on a bond the way you can raise a dividend. The interest rate is fixed. So the market will adjust the price of the bond so that the same $50 now yields 5.5%. In this example, the bond will fall to about $909 because $50 in interest divided by $909 is 5.5%.

Similarly, if rates drop, a bond with a 5% coupon will become more valuable because a new bond won’t have as attractive a yield. If a new bond pays 4.5%, then the 5% bond will climb to $1,111 because $50 divided by $1,111 equals 4.5%.

So investors who buy bonds next year will have the opportunity to earn strong yields. If the Fed eventually lowers interest rates, the value of the bonds will go up as well, and they can then be sold for a profit or held until maturity, collecting a high rate of interest.

I have a few rules for investing in bonds that I strongly recommend investors follow.

• Buy only bonds you plan on holding until maturity. If the price goes up and you have the chance to take a profit, you can, but you should feel very comfortable owning the bond until the maturity date and collecting your interest.
• Don’t watch the price of your bond every day. If you’re going to own a bond until maturity, who cares where it’s trading today or tomorrow? You know that when it matures, it will pay out $1,000. So if the bond drops to $900 or rises to $1,050, it really doesn’t make much of a difference. You’re probably not going to sell it anyway.
• Understand the risks. Bonds are very safe. Investment-grade bonds (rated BBB- or higher) have a default rate of just 0.1%. Junk bonds, or non-investment-grade bonds, have higher yields but carry higher risk. They have a historical default rate of 4.22%, with most of those occurring in bonds rated CCC or lower. So even if you buy a junk bond rated BB, you can earn a higher interest rate than you would with an investment-grade bond, without taking on too much risk. Unless you’re willing to speculate, I recommend buying bonds rated BB or higher to drastically decrease the likelihood of default.
• Keep the maturities fairly short (for now). Don’t buy bonds with maturities more than five years out. It’s a good idea to have maturities staggered so that there is always some capital being freed that can be used for expenses or to invest in new bonds. So you may want to buy some that mature in two years and others that mature in three years, four years and five years.

I’m going to be putting more of my own money to work in bonds in 2023 to take advantage of higher yields and the safety that bonds provide.

I recommend investors do the same.

The post Why I’m Buying Bonds in 2023 appeared first on Wealthy Retirement.

The company makes money by collecting rent from its tenants, the doctors and other medical professionals who lease space from it. Its cash flow is directly tied to the healthcare market.

And right now, the healthcare industry is going gangbusters.

Spending on healthcare reached a record $3.6 trillion a year last month. It’s predicted to rise 5.3% in 2018. And it should continue to head north for the next decade.

The Centers for Medicare and Medicaid Services estimates healthcare will make up nearly 20% of the U.S. economy by 2026.

One of the biggest drivers of this growth is something we all have in common: We’re all getting older.

In fact, the U.S. Census Bureau predicts that by 2035, people 65 years and older will outnumber children 18 years and younger for the first time in U.S. history…

Typically, older people need more healthcare. The country needs more doctors and other medical providers to meet that demand. In turn, these medical professionals will need more office space.

This trend is good news for Physicians Realty Trust. More tenants mean higher occupancy rates and higher rents.

That should be even better news for the REIT’s cash flow and its 6% dividend yield.

Physicians Realty Trust began paying dividends shortly after it went public in 2013. There have been a few small raises since then and zero cuts.

Last year, the healthcare REIT paid out $0.92 per share in dividends. Funds from operations (FFO), a measure of cash flow for REITs, were $0.94 per share. FFO covered the dividend in 2017, but not by much.

In 2018, Bloomberg analysts expect Physicians Realty Trust to generate $1.11 per share. That’s an 18% jump in the right direction.

These same analysts also expect the company to raise its dividend by a penny this year to $0.93, leaving it well covered.

With occupancy levels north of 96% at the end of 2017, Physicians Realty Trust will need to acquire and fill new medical office properties to keep FFO growing.

But as long as FFO continues upward, the dividend will be safe.

Dividend Safety Rating: B

If you have a stock whose dividend safety you’d like Marc to analyze, leave the ticker symbol in the comments section below.

Good investing,

Kristin

The post Is This REIT’s Dividend Just What the Doctor Ordered? appeared first on Wealthy Retirement.

Dividend investing is a lot like shopping at an outlet mall. Most of the time, you spend hours digging through stocks to find a bargain… only to walk away empty-handed.

Sure, there are always plenty of stocks with big dividend yields that seem to be on sale. But, like a lot of outlet mall merchandise, many of these discounted dividend stocks are too good to be true. They’re discounted for a good reason.

Tanger Factory Outlet Centers (NYSE: SKT) is one of the largest outlet center owners. It’s the only publically traded “pure play” outlet mall real estate investment trust (REIT).

The company has built its business on the thrill of finding a good deal.

The outlet mall concept has been a bright spot among traditional brick-and-mortar retailers – one that is seemingly immune from online competition.

But this year, some have started to question the outlet mall’s moat. The REIT has fallen nearly 18% on fears that online shopping is taking a bite out of its market share.

And Tanger is yielding 6.3%.

Is Tanger’s dividend a good deal… or is it cheap because it’s at risk of a price cut? Let’s look at the REIT’s fundamentals and find out.

A Hole in Tanger’s Pocket?

Last year, Tanger’s adjusted funds from operations (AFFO) were $245.3 million. AFFO is a measure of a REIT’s cash flow.

It was up 6.9% from the $238.4 million it reported in 2016.

In 2017, Tanger paid out $130.2 million in dividends. The dividend was well-covered by AFFO. Its payout ratio was 53.08%.

But recently, Tanger lowered its 2018 AFFO outlook, which Bloomberg analysts now expect to fall 17.24% to $203 million.

Retail bankruptcies have taken their toll on the company’s average occupancy rates. With empty stores, Tanger must offer rent concessions to tenants renewing their leases.

The company isn’t opening any new outlet centers either. It’s shortening its leases to boost occupancy rates. Management is hoping to preserve upside potential when conditions improve.

Although AFFO is forecast to fall, it’s still more than enough to cover the 4.4% dividend increase expected by Bloomberg this year.

Almost an Aristocrat

Tanger has raised its dividend for 24 consecutive years. A boost in 2018 would make it 25.

This would put Tanger on par with the Dividend Aristocrats. Dividend Aristocrats are Perpetual Dividend Raisers that have raised their dividends every year for 25 years or more. They’re also members of the S&P 500, which Tanger is not.

We usually don’t like to see declining cash flows. But Tanger’s low payout ratio and history of raises make the dividend a safe bet.

However, if AFFO declines again in 2019, Tanger’s safety rating could fall with it.

Dividend Safety Rating: B

If you have a stock whose dividend safety you’d like Marc to analyze, leave the ticker in the comment section below.

Good investing,

Kristin

The post Is This Dividend a Bargain… or a Bad Deal? appeared first on Wealthy Retirement.