Conventional wisdom is not always correct. In the investing world, this is especially true when it comes to bonds.
No, attractively yielding fixed-income opportunities are not confined to junk bonds. And no, the 60/40 portfolio is not dead. There are countless investment grade bonds issued by strong, well-known companies, yielding over 4%. That is more than three times the dividend yield of the S&P 500 (SPY).
No, it is not true that "bond-equivalent" stocks are as safe as bonds. Individual stocks can and sometimes do go lower, never to return to an investor's cost basis, despite the underlying company continuing to operate successfully many years into the future. I recently highlighted one such example in my commentary AT&T: 7 Alternatives With 4% to 10% Yields. Furthermore, common stock is at the bottom of the capital structure, which means common-stock dividends will be cut before interest payments on a company's bond are skipped.
No, long-duration bonds should not be reserved for pension funds and insurance companies. The financial crisis of 2007 to 2009, which led to the Fed's frequent forays into ZIRP and QE, changed that example of conventional wisdom. Individual investors putting their fixed-income money to work in the short-to-medium duration parts of the yield curve have been decimated by opportunity cost over the past 14 years.
No, a bond investor is not stuck holding a bond to maturity. Individual bonds can be bought and sold just like a stock and just like a bond fund. Even in the municipal-bond market, where no active bid-side liquidity is typically available, I will routinely get a few dozen bids when I offer my bonds for sale. In the corporate bond space, I will routinely have both buy and sell orders filled in between the bid and ask, thereby reducing the wider spreads that bond haters use to scare investors away from the opportunities the professionals would rather keep to themselves.
No, buying-the-dip is not just for equity investors. I almost always average into my bond positions. Because of this, I absolutely love rising-rate environments. It gives me the opportunity to capture ever higher rates in a financial security that is contractually required to return to 100 cents-on-the-dollar on a specific date in the future.
No, bond funds are not the best way to get exposure to fixed income. Most bond funds do not carry the same contractual agreement to return to 100 cents-on-the-dollar that individual bonds do. And all bond funds that I know of have fees. If you are concerned about capturing every basis point of yield that you can, it would be counterintuitive to give up your yield to a fund manager. This is especially true in a fund buying investment grade bonds, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).
With a 30-day SEC yield of just 3.19%, a weighted average coupon of just 3.60%, a yield-to-maturity (YTM) of just 3.35%, and a not-too-small duration of 9.2 years, LQD doesn't exactly put the bond market's best-foot forward. Combine all that with the following, and I start to wonder why I should bother buying the widely held $33.7 billion fund: (1) fees of 14 basis points, (2) the fact that every single company mentioned in this commentary has bonds held in LQD, and (3) that LQD has 830 bonds maturing in 2040 or later, including 289 bonds maturing in 2050 or later. Additionally, does a bond investor really need nearly 2,500 bonds to be properly diversified? Not in my opinion.
Why would I own LQD, when I can directly own a diversified group of great companies with well-established brands and cash flows, doing business all over the world? It is not difficult to capture higher yields than popular bond funds are offering. Literally today, I could have put together a diversified portfolio of investment grade bonds with yields notably higher than LQD's 3.35%.
As an exercise, I would like to present 10 great companies with investment-grade bonds yielding 4% or more. I suspect many readers will be surprised to learn that such name-brand companies are offering such attractive yields higher up the capital structure.
The Kroger Co. (KR) - Headquartered in Cincinnati, Ohio, Kroger is the largest of the traditional supermarket chains in the United States, with more than 2,700 grocery stores across a variety of local banners. Moody's projects Kroger will end its current fiscal year with approximately $130 billion in revenue, debt/EBITDA in the neighborhood of 3.1x, and EBIT/interest expense around 4.7x. In a November 19, 2021, report, Moody's describes Kroger as having "an excellent liquidity profile."
Kroger's longer-dated bonds recently crossed the 4% threshold, now yielding more than two-and-a-half times the stock's dividend. The October 15, 2046, maturing notes, CUSIP 501044DF5, are trading below par and offered at a 4% yield-to-maturity. For investors willing to pay a premium to par, the February 1, 2047, notes, CUSIP 501044DG3, are offered at a 4.045% YTM and a 4.186% current yield. Both CUSIPs are rated Baa1/BBB by Moody's and S&P, respectively.
Boeing (BA) has a variety of mid-to-upper 4%-yielding bonds available for purchase, depending on one's preference for maturity date and coupon. For example, the May 1, 2049, maturing notes, CUSIP 097023CK9, are currently offered at 90.095 cents-on-the-dollar, with a 4.538% YTM and a 4.329% current yield. They are rated Baa2/BBB- by Moody's and S&P, respectively.
For those unaware, Boeing, headquartered in Chicago, Illinois, is a leading U.S. defense contractor that shares a global large-passenger aircraft duopoly with Airbus. Moody's projects for Boeing $78 billion of 2022 revenue. The ratings agency also recently noted that a full recovery of Boeing's less than appealing credit metrics will take until at least 2024. In the words of Moody's, "We continue to expect that restoring the company's credit metrics toward levels commensurate with the rating level will occur sequentially and take several years. Financial policy - that of retiring upward of $40 billion or more of debt - will favor creditors for several years, with the company applying all free cash flow to debt reduction to rebuild financial strength."
As common-stock investors painfully know, Boeing cut its dividend in early 2020. The bonds, however, continued to pay out.
CVS Health Corp. (CVS) has one of my favorite bonds not yet a member of my portfolio (but high on my watch list). Its April 1, 2040, maturing notes, CUSIP 126650DK3, have a 4.125% coupon and a YTM of 4.005%. The 4.063% current yield is much higher than the 2.15% dividend yield of the common stock. I am hoping to grab this Baa2/BBB rated bond under par.
From a credit-metrics perspective, Moody's projects revenue upwards of $300 billion over the next year or so, with debt/EBITDA of 3.5x to 4.0x and EBIT/interest of 4.2x to 4.5x. Moody's also notes CVS liquidity as being "excellent."
CVS, a company that has turned itself into a health-care juggernaut, is headquartered in Woonsocket, Rhode Island.
Oracle (ORCL), a $200 billion market-cap tech titan headquartered in Austin, Texas, offers several high-yielding bonds. I recently wrote about a few of them in my commentary Oracle: Capture Yields Up To 4.75% With These Bonds. At this time, the 4.50% coupon, July 8, 2044, maturing notes, CUSIP 68389XAW5, are yielding 4.766%, and the 4.125% coupon, May 15, 2045, maturing notes, CUSIP 68389XBF1, have a YTM of 4.80%. Both of these yields absolutely crush the 1.75% dividend yield of the common stock. The notes are rated Baa2/BBB+ by Moody's and S&P, respectively.
McDonald's Corporation (MCD), headquartered in Chicago, Illinois, needs no introduction. The company currently has six bonds yielding between 4.004% and 4.132%, all of which are rated Baa1/BBB+ by Moody's and S&P, respectively. This compares to a common-stock dividend yield of 2.48%. The CUSIPs are 58013MFK5, 58013MFR0, 58013MFH2, 58013MFC3, 58013MFA7, and 58013MEV2.
For the end of 2022, Moody's had been projecting debt/EBITDA of roughly 3.6x and EBIT/interest expense in the 6.1x to 6.8x range. But McDonald's announcing the closure of all 850 of its locations in Russia while simultaneously continuing to pay its employees in those locations, may complicate matters. The company's most recent Form 10-K discloses $518 million of Russian Ruble exposure at year-end 2021. The Ruble is down approximately 43% against the U.S. dollar since December 31, 2021.
FedEx Corporation (FDX) - Like McDonald's, FedEx has numerous bonds yielding over 4%. For example, the April 15, 2043, maturing notes, CUSIP 31428XAU0, are currently yielding 4.163%. For investors willing to pay a premium to par, the November 15, 2045, maturing notes, CUSIP 31428XBE5, have a 4.218% YTM and a 4.402% current yield (higher current yield due to the 4.75% coupon). The 4.402% current yield I just mentioned is three times higher than FDX's common stock dividend yield.
FedEx, as Moody's puts it, is "the largest express transportation company in the world," with company headquarters in Memphis, Tennessee. For 2022, the ratings agency projects FedEx to have $89.1 billion of revenue, debt/EBITDA of 3.0x, and EBIT/interest expense of 4.8x. In my mind, the acceleration of e-commerce that began in the pandemic is likely to continue for years to come, benefitting FedEx.
The Southern Co. (SO) - The newest edition to my bond portfolio is Southern Company's July 1, 2046, maturing notes, CUSIP 842587CX3. Today, the 4.40% coupon, Baa2/BBB rated bond was offered right around par throughout the afternoon. For investors who prefer a shorter-dated bond, the 2036 maturing notes, CUSIP 842587CW5, have a current yield of 4.106%. The yield-to-maturity, however, is still just shy of 4%, at 3.927%. Even though the reputation of utilities is to provide massive dividends, the bond I purchased still outperforms the stock's dividend by more than 50 basis points.
I only picked up half a position in the aforementioned 2046-maturing bond because one thing that scares me at this time is the potential for a Russian hack on the U.S. power grid. If such a hack were to occur, I can't quantify how it might impact Southern Co's financials-i.e., future potential liabilities and lost revenue if the power goes out for weeks to months.
Southern Company is headquartered in Atlanta, Georgia, and is one of the largest utility companies in the United States, serving 9 million customers through its various subsidiaries.
AT&T (T) is a debt juggernaut, offering investors countless opportunities to capture yields over 4%. At the end of trading on March 8, 2022, I counted 40 AT&T CUSIPs yielding over 4%, all rated Baa2/BBB by Moody's and S&P, respectively. My recent Seeking Alpha commentary AT&T: 7 Alternatives With 4% to 10% Yields, details a variety of options to capture up to 10% yields in the upper echelons of AT&T's capital structure.
Headquartered in Dallas, Texas, AT&T is the largest telecommunications company in the United States. Moody's projects the company to end fiscal year 2022 with revenue of $136.769 billion, debt/EBITDA of 3.7x, and (EBITDA minus CAPEX) / interest expense of 4.8x.
eBay (EBAY) has two different CUSIPs yielding over 4%. The July 15, 2042, maturing debt, CUSIP 278642AF0, with its 4.00% coupon and its Baa1/BBB+ credit ratings, offers a 4.106% YTM. This is the eBay CUSIP I own. I was able to pick up this bond in March 2020, at a YTM of 5.568%, which helps demonstrate how much of a hit the bond might take under the right conditions. For anyone out there interested in 30-year debt, eBay's May 10, 2051, maturing notes get you pretty close. At the time of this writing, CUSIP 278642AZ6 offers a 4.152% YTM. That's a massive 250 basis points more than eBay's common-stock dividend.
Headquartered in San Jose, California, eBay probably needs no introduction as a global provider of online marketplaces. When purchasing a longer-term bond, the staying power of the business is really important. In my view, the secular growth of online sales will continue to be a tailwind for eBay's business. But it is entirely possible that over time, larger competitors like Amazon (AMZN) or Walmart (WMT) start to meaningfully disrupt eBay's business model. That is one of the reasons I went with the 2042-maturing notes instead of the 2051-maturing bond.
Altria (MO) - There are other companies I could have included in this list. I hesitated including the largest tobacco company in the United States as the 10th "great company" with bonds yielding 4% or more. But despite my distaste for tobacco and the dangers it poses, the reality is that a company (1) with bond yields over 5%, and (2) which, in the words of Moody's, "will continue to be one of the world's most profitable consumer products companies," probably deserves the final spot in my list.
At the time of this writing, Altria had 10 CUSIPs currently yielding over 5%. As I scan the list, the 4.50% coupon, May 2, 2043 maturing notes, CUSIP 02209SAQ6, with their A3/BBB credit ratings and 5.151% YTM look enticing. Altria's bonds do not have a spot in my portfolio, although perhaps I should reconsider. While I do not view myself as qualified to comment on the long-term staying power or liabilities associated with a tobacco company, I would like to note that Moody's projects fiscal year 2022 revenue of $21.309 billion, debt/EBITDA of 2.5x, EBITA/interest expense of 9.0x, and an EBITA margin % at a whopping 55.0%. Those credit metrics look awfully good to me. And Altria, headquartered in Richmond, Virginia, happens to operate in a category with 1.3 billion global consumers.
Bond investing is not dead. The 60/40 portfolio can still be created. The key is to take advantage of the opportunities when they present themselves. In the years 2018 and 2020, bond investors had such opportunities. The bond market is currently crossing into attractive territory. It can get a lot more attractive. But informing investors after the fact seems rather pointless to me. It is better to know ahead of time, so one can prepare a watch list suitable to one's specific needs and risk tolerance. And then, when the time comes, each of us can enter into positions in the same way investors do with stocks-by averaging in and buying-the-dip.
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Disclosure: I/we have a beneficial long position in the shares of SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long the bonds of KR, BA, ORCL, MCD, FDX, SO, T, and EBAY.