While I continue to hold dividend stocks for the long term, lately I’ve been putting most of my cash to work in fixed income.

Treasurys are yielding more than they have since 2007. Investment-grade corporate bonds – those with very safe S&P Global ratings of BBB- or higher – have an average yield of 6.3%, their highest yield in nearly 15 years.

Meanwhile, non-investment-grade bonds, or junk bonds, are yielding an average of 9%. While these are more speculative than investment-grade bonds, they are still more conservative than stocks – even blue chip stocks.

Here’s why…

There’s a very key difference between stocks and bonds.

A stock is worth only what someone is willing to pay for it at a given time.

A bond is worth $1,000 at maturity regardless of what anyone is willing to pay for it at any time.

Here’s what I mean.

When you buy a stock, the only way to make money on it is to sell it for more than you paid. When you want to sell the stock, you have to hope the price is higher than it was when you bought it.

With a bond, you know what the exact price of the bond will be on a certain future date. On the bond’s maturity date, you will receive $1,000 unless the company has gone bankrupt. Barring that unlikely scenario, you will get $1,000, regardless of whether you paid $1,000, $900 or $500 for the bond. You’ll also collect interest along the way.

It’s important to realize that even if the price of the bond falls while you own it, that won’t affect your eventual payout. At maturity, you will be paid $1,000.

So let’s say you buy a bond with a 5% coupon that matures on November 1, 2026. Right after you buy the bond, the company posts bad news and the bond drops to $950. A year later, there’s more bad news, and the bond market starts getting scared. Your bond drops all the way to $700, which is a big move in the bond market.

As we approach November 1, 2026, the bond’s price starts moving closer to the $1,000 mark. On that date, the bond matures and you are paid $1,000. It doesn’t matter that the market lost confidence in the bond two years earlier and the bond was trading at a huge discount. The bond will pay $1,000 at maturity no matter what.

The stock market has been a mess for two years. The S&P 500 is up this year, but that’s mostly due to seven Big Tech stocks. Most stocks in the market are down… and many are down big.

And this bear market shows no signs of slowing down in the near future.

When you can earn more than 5% risk-free in the short term in Treasurys, more than 6% in safe corporate bonds or even 9% in more speculative bonds and get your money back, you have to ask yourself whether it’s worth it to risk your cash in stocks, which historically average a return of 8% to 10% per year but involve much more volatility.

My long-term money is still invested in stocks because I (hopefully) have plenty of time for those stocks to grow. But my funds that I’ll need in the shorter term are in bonds right now.

I have a bunch of bonds maturing between now and the end of the year, and I’m excited about the safe income-producing opportunities we have now that weren’t available just a year ago.

You rarely hear someone pounding the table on bonds.

I am.

The post Today Is the Perfect Day to Buy Bonds appeared first on Wealthy Retirement.

There are no investments out there that reliably grow wealth over the long term like stocks.

Over decades, stocks are even safer than bonds, which goes against conventional thinking. Jeremy Siegel’s book Stocks for the Long Run shows that not only do stocks outperform bonds – which is not a surprise – but also, over periods of 10 years and longer, stocks’ worst performance was better than the worst performance of bonds.

Between 1802 and 2021, the worst 10 years for stocks showed a decline of 4.0%, while bonds dropped 5.4%. Over a 20-year period, stocks never lost money, while bonds’ worst performance came in at a loss of 3.1%.

So why am I “quitting the stock market” in favor of bonds?

In the short run, bonds – especially those of quality companies – are safer than stocks.

I Can’t Take Much Risk

I’m currently paying college tuition for two children. My wife and I have diligently saved and invested for more than 20 years for this moment. Over the next couple of years, we will pay an insane amount of cash to institutions of higher learning. And I’m not willing to take much risk with that chunk of money.

The closest you’ll come to a guarantee of getting your principal back is an investment in Treasurys. That said, owning quality corporate bonds is a pretty safe bet.

Junk bonds, the riskiest corporate bonds, have a historically low default rate of just around 1%.

And investment-grade bonds have a minuscule average default rate of around 0.44%.

So your chances of getting your money back are extremely high.

When I invest in bonds, I’m not planning on selling them at a profit. If their prices go up and there’s an opportunity to sell them, great – but my bond positions are intended to produce income and protect capital. I expect to hold a bond until maturity.

I buy bonds with short maturities because I need the money soon.

I am creating a bond ladder where various bonds will mature in each of the next few years. I’ll earn some interest on the bonds while the money is invested, and each year, as the bonds mature, the money will become available to pay tuition.

While I love my dividend stocks, anything can happen in the short term. And if the market falls, I want to be able to buy more dividend payers.

Should the bond market tank in the next few years, I really don’t care. I don’t plan on selling my bonds, so the price doesn’t matter to me. When the bonds mature, I’ll cash them out.

Corporate bonds are not risk-free, but they are a pretty safe way to earn some interest and count on all of your investment being available to you when you need it, as long as you time it right with the correct maturities. In other words, if you need the cash in December 2023, make sure your bond matures before then.

The good news is the bond market is so large that you shouldn’t have a problem finding bonds with the maturity date you want at the risk level you’re comfortable with.

If you can’t tolerate much risk on your short-term funds, corporate bonds are a great way to invest.

The post Quit the Stock Market and Buy Bonds 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.

I’m talking about individual bonds, not bond funds. In fact, I strongly recommend you stay away from bond funds. If interest rates continue to climb, you will lose money in a bond fund, whereas with individual bonds, you will make money. I explain why here.

As long as rates are rising, stick with individual bonds.

Here’s exactly how to do that.

Buying individual bonds is similar to buying stocks, but it’s not exactly the same.

You can buy any stock you want that is listed on a U.S. exchange with any domestic broker. The price will be the same no matter where you look. But not every broker has every bond available to its customers.

Some brokers have bonds in their inventory that they can sell you. Other times they will have to go out into the open market to get the bonds for you. There are occasions when they will not be able to obtain the desired bonds for customers if there are no sellers.

If you don’t see the bond you want on your broker’s website, call its fixed income desk and ask it to get it for you. Don’t just speak to a representative. Call the fixed income desk so that you’re speaking with someone who specializes in bonds.

To buy a bond online, you go to the fixed income (sometimes shown as “Bonds/CDs”) section of your broker’s website. You can do a search for bonds based on certain criteria, such as maturity date, S&P or Moody’s ratings (they rate how safe or risky the bonds are), and yield to maturity (YTM) – which is essentially the annual return you will earn on the bond.

Or if you know the bond you want to buy, you can enter the CUSIP, which is similar to a stock ticker. The CUSIP is a combination of nine numbers and letters. While a stock ticker will be in the format of “ABC,” a CUSIP may look like “12345abc6.”

You enter the CUSIP, and your broker’s site will bring up all of the relevant information, including the price, the YTM and the minimum number of bonds you must buy to place an order, which is another difference between stocks and bonds. Some bonds may have no minimums, but others may have large ones – it all depends on the seller.

Here is what it looks like on TD Ameritrade if you pull up an individual bond. This is a bond for the Pacific Gas & Electric (CUSIP 694308hg5) 3.75% coupon bond maturing on February 15, 2024.

The bond was issued by utility Pacific Gas & Electric. It pays a 3.75% coupon, which means it pays $37.50 per year in interest because the coupon is always based on the $1,000 price at which nearly all bonds are issued. It matures on February 15, 2024. You can see the CUSIP next to the name of the bond.

Below that are more details, including the bond’s rating – Baa3 by Moody’s and BBB- by S&P.

While the bond pays a 3.75% interest rate, the YTM is around 6% because the price is around $97, which actually means around $970 per bond. You multiply the bond price by 10 to get how much the bond actually costs. So the interest rate is a little higher than 3.75% because the principal is lower than $1,000. The first line shows a price of $97.125, which means $971.25 per bond (remember, multiply the bond price by 10 for the actual cost). . The bondholder will also make $28.75 in profit at maturity because they paid $971.25 for the bond but it will be redeemed for $1,000. So the profit plus the interest is included in the YTM calculation.

You’ll also see that there are different sellers out there. The first one requires a 10-bond minimum at a price of $97.125. The second, also with a 10-bond minimum, is asking $97.210. If you want to buy just one bond, you’ll pay $97.317.

If you want to buy the bond, you’d click the “Buy” button under the company name and on the next screen you’d enter how many bonds you want to buy and at what price if it’s different from what’s shown on the page.

If you didn’t buy the bond and wanted to check on it the next day, you’d just go to the fixed income page and enter the CUSIP to see if anything changed, such as the price, minimums, etc.

Like anything you do for the first time, buying a bond can seem intimidating. But most of us felt the same way when buying a stock online the first few times. Once you play around on your broker’s bond page, you’ll get more comfortable and you’ll start earning safe 6% or higher yields in no time.

Good investing,

Marc

P.S. Let me know in the comments section what questions you have about buying bonds, and I’ll try to address them in an upcoming Wealthy Retirement article.

The post How to Add Bonds to Your Portfolio appeared first on Wealthy Retirement.