Juicing Your Income with Select Bonds

I do not fault any investor who does not wish to speculate with individual bonds. Mutual funds and ETFs give the investor diversity. With ETFs, the cost to own the investment portfolio is quite modest.

Still, there is a risk of going too long with blended bond funds, and short duration funds are producing a miserly return. As inflation rears its ugly head (a distinct possibility), principal will be sacrificed.

If you wish to take the plunge, I recommend using your on-line brokerage service to screen bonds maturing in four years or less with an acceptable rating risk to beef up your income and to collect your full principal upon maturity. Obviously, bonds with close maturity dates will largely negate the effects of long term inflation.

Here are a few examples of bonds that I have looked at over the weekend:

• Citigroup (C) 172967DH1 rated A3/A 5.125% maturing 2-11-11 priced at $99 to yield 5.735%.
• Alcoa (AA) 013817AD3 rated Baa3/BBB- 6.5% maturing 6-1-11 priced at $100.80 to yield 6.069%.
• Steelcase (SCS) 858155AC8 rated Baa3/BBB 6.5% maturing 8-15-11 priced at $99.75 to yield 6.62%.
• Genworth (GNW) 37247XAE2 rated A2/A 5.375% maturing 9-15-11 priced at $90.50 to yield 10.067%.
• Health Care Properties (HCP) 421915EF2 5.95% rated Baa3/BBB maturing 9-15-11 priced at $98.75 to yield 6.535%.
• Citicorp 173034GV5 7.25% rated Baa1/A- maturing 10-15-11 priced at $98.88 to yield 7.77%.
• XLCapital (XL) 983730AA0 6.5% rated Baa2/BBB+ maturing 1-15-12 priced at $96. to yield 8.204%.
• Marriott (MAR) 571903AG3 4.625% rated Baa2/BBB- maturing 6-15-12 priced at $96.75 to yield 5.78%.
• Bank of America (BAC) 060505AR5 4.875% rated A2/A maturing 9-15-12 priced at $98.87 to yield 5.25%.

I prefer bonds trading at a modest discount so a capital gain may also be acquired at maturity. Short term maturities are a must to protect against inflation. I am not concerned about deflation - the government printing presses are taking that scenario off the table.

If you prefer a mutual fund, I have recommended the Fidelity Strategic Income Fund [FSICX] on several occasions. Up nicely this year, it presently is priced at $9.42 to yield 5.75%. This $4.5B fund invests approximately 55% in US and 35% in foreign bonds,investment grade to speculative in quality. It is carrying about 10% in cash equivalents.

The universe of individual foreign corporate bonds not denominated in dollars is appealing and will be addressed in a future post.

Comments

[Larry House:]

Sound info. I prefer individual bonds to funds for the reasons you have given. As long as the government is providing a backstop for banks and other financials, I am quite willing to invest in those bonds with 1-5 year maturities. I would add AXP, GS. MS to the list as well.

May 18 10:22 AM

[Brian L.:]

what about T Rowe Prices High Yield Bond fund. PRHYX. Priced at
5.32 as of May 18 with a dividend yield of 8.32 % and a 3 month return of nearly 9%.
Any comments on this one.

May 18 02:34 PM

[Thomas J. G...:]

I'm impressed. I tried to reference mutual funds in one of my articles and the seeking alpha editors told me they don't publish references to mutual funds. I had to find equivalent etf's to all the mutual funds I was talking about.

May 18 04:15 PM

[Fabien Hug:]

I don't have that one. 4 stars with MS, manager in place since 1996, good yield for the duration of 3.36 year, no short position and reasonable expense ration of 0.76%. Just one thing to study, a position of 6.59% of assets in a T Rowe Price Reserve (maybe their the cash on hand 8.4%).
It seems all clear, I'll check it further.


On May 18 02:34 PM briantigers2009 wrote:

> what about T Rowe Prices High Yield Bond fund. PRHYX. Priced at
>
> 5.32 as of May 18 with a dividend yield of 8.32 % and a 3 month return
> of nearly 9%.
> Any comments on this one.

May 18 08:11 PM