In the world of ZIRP (zero-interest-rate policy), it is not unusual to come across investors who are so fed up with "low" yields that they instead buy stocks for income. Over the past couple years, I've met plenty of people who admittedly would rather be in fixed income but feel forced into stocks. In many of my conversations with income investors who feel "forced" into stocks, they claim to not care about the price fluctuations of the initial investment. Instead, they appear focused on the income. It wouldn't surprise me to see much more of this type of thinking as the baby boomers approach retirement. This might be especially true for those who have sizeable retirement funds (and the ability to not draw down principal to a large extent) as they search for steady income streams.
With all this in mind, I would like to point out that there are currently several investment grade rated bonds of non-financial companies yielding over 5%. Or course, when buying individual bonds, there is counterparty risk. Although, in some respects that risk exists with individual stocks as well (if the bonds don't pay out, the stocks are going to get crushed). It is also true that there is the risk of inflation eroding the purchasing power of the fixed rate bond's payments. Likewise, there is the risk that higher prices in commodity markets will destroy the future profits of public companies (and hurt stock prices). This could especially be true in a future environment in which it will be challenging to raise prices on tens of millions of baby boomers living on fixed incomes.
In fact, it's possible that the same inflation hurting the purchasing power of a fixed income security could prove to hurt the stock price of a business even more. Equity investors might exude all sorts of confidence about the future direction of prices; but in reality, they cannot definitively tell you whether in 30 years the S&P 500 (NYSEARCA:SPY) or an individual stock will be trading higher or lower than today's price. They also cannot tell you what dividend yields, earnings per share, or price-to-earnings ratios will be in 30 years time. Likewise, a fixed income investor cannot tell you the inflation rate, who the Fed chairman will be, how much money printing will be going on, or how corporate bond spreads will behave over the coming decades. The truth is, nobody knows any of this stuff. We can only speculate.
If you are one of the investors I described above who needs income and couldn't care less about the fluctuation of the principal (whether in nominal or real terms), among others, here are a few long-term bonds with investment grade ratings currently yielding over 5% that are available to retail investors:
Newmont Mining's (NYSE:NEM) senior unsecured note (CUSIP: 651639AP1) maturing 3/15/2042 has a coupon of 4.875% and is asking 93.753 cents on the dollar (5.293% yield-to-maturity before commissions). It has a make whole call, is callable at par beginning 9/15/2041, and pays interest semi-annually. Moody's currently rates the note Baa1; S&P rates it BBB+.
Alcoa's (NYSE:AA) senior unsecured note (CUSIP: 013817AK7) maturing 2/1/2037 has a coupon of 5.95% and is asking 98.643 cents on the dollar (6.056% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Baa3; S&P rates it BBB-.
Amgen's (NASDAQ:AMGN) senior unsecured note (CUSIP: 031162BK5) maturing 11/15/2041 has a coupon of 5.15% and is asking 98.64 cents on the dollar (5.24% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Baa1; S&P rates it A+.
Simon Property Group's (NYSE:SPG) senior unsecured note (CUSIP: 828807CL9) maturing 3/15/2042 has a coupon of 4.75% and is asking 95.027 cents on the dollar (5.075% yield-to-maturity before commissions). It has a make whole call, is callable at par beginning 9/15/2041, and pays interest semi-annually. Moody's currently rates the note A3; S&P rates it A-.
Corning's (NYSE:GLW) senior unsecured note (CUSIP: 219350AW5) maturing 3/15/2042 has a coupon of 4.75% and is asking 95.854 cents on the dollar (5.018% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note A3; S&P rates it BBB+.
With maturities of 25 to 30 years, you might not want to purchase a bond yielding 5% to 6%. If this is the case and you believe interest rates are heading higher in the near-term, one option is to put these bonds on a watch list and purchase them at a future time. Another possibility is to utilize the strategy many equity managers promote, dollar-cost averaging. Members of the investing community often cite rising rates (falling prices) as a reason to avoid bonds, but falling equity prices as a reason to buy stocks. In reality, dollar-cost averaging into a position can be utilized for both stocks and bonds. Averaging into your position over time can help mitigate mark-to-market declines in the average price of an individual bond position while also raising your average yield over time (if interest rates go higher). Investors in the stock market love to talk about buying the dip. Well, you can also do that in the fixed income world.
Furthermore, if you do care about the fluctuation of the principal in nominal and/or real terms, perhaps consider a barbell approach to investing. In the fixed income world, barbell strategies might make you think of owning both ultra-short and very long maturities. What I am referring to is a bit different. It involves looking at different parts of the financial system's capital structure, rather than just focusing on a barbell within one type of asset. And, in fact, there are many different ways to execute the strategy. It all depends on your investment needs.
One example would be to own fixed income securities of longer maturities while also owning gold (NYSEARCA:GLD). Another might be to own longer dated fixed income securities while also owning the stocks of companies or the ETFs of industries, sectors, or commodities that an investor would expect to do well in an inflationary environment (while keeping in mind that, in reality, the future is extremely uncertain). There are many other ways to create a barbell in your portfolio, including using options to enhance fixed income returns.
I fully expect there to be investors who think they have everything figured out and will go all-in on a strategy that fits their view of the future. If you aren't that type of investor, but instead recognize the possibility for a variety of different outcomes to the financial realities we face today and would like to prepare your portfolio for various scenarios, one portion of your planning might involve steady fixed income payments coming from the top of a corporation's food chain. As yields do what they seem to do at some point every year, namely, go higher for a period of time, use this as an opportunity to at least consider the role a held-to-maturity portfolio of individual bonds might play in your portfolio.
If you are interested in purchasing any of the securities mentioned in this article but are nervous about counterparty risk wreaking havoc on your portfolio, learn how to hedge individual bonds in, "Protect Your Income Portfolio With Cross-Asset Hedging."
Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article, "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. For additional information on any of these notes, please contact your broker or read the indenture.
Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long Newmont's CUSIP 651639AP1. I am long Alcoa bonds, although not the CUSIP mentioned in this article. I am long gold.