It may be hard to believe, but it is actually possible to find decent yields in this world of ZIRP (zero-interest-rate policy). After reading my article, "5 Bonds Yielding Over 5% Right Now," a reader inquired about the possibility of building a portfolio of individual bonds with an average yield close to 7%. If you are willing to go further down the credit rating spectrum and/or move further out on the yield curve to much longer-dated bonds, then building a portfolio of individual bonds averaging out to a yield close to 7% can certainly be done.
In fact, I recently ran a screen for corporate bonds with 7% or greater yields that excluded any credit ratings from Moody's and S&P below B3/B-. It turns out there are a ton of bonds currently being offered in the secondary market that fit that criteria. Altogether, I came across 443 bonds with 1,584 offers. Furthermore, if the goal is to simply obtain an average yield in the 7% range, then I thought it would be worth expanding the search to include corporate bonds yielding as low as 6% that excluded any credit ratings from Moody's and S&P below B3/B-. When doing so, the screen returned 775 bonds with 5,315 offers.
When building a 7%-yielding portfolio in today's interest rate environment, you will want to keep in mind that the chances are quite good that you will be purchasing bonds subject to large price swings not necessarily tied to the price movements of Treasuries. In a world of ZIRP, in order to build a fixed income portfolio with yields near 7%, you will certainly be purchasing non-investment grade rated bonds. When it comes to junk bonds, the market often quickly and sometimes ferociously adjusts the spreads to Treasuries in reaction to changes in the economy and/or changes to that company's business. Keep in mind that you could buy a bond yielding 7% and watch it go to 15% the next time the economy takes a turn for the worse.
However, if your intent is to hold the bond to maturity, you are happy with the yield, and you are satisfied with the credit risk of the company whose bond you want to purchase, then mark-to-market changes in the price of a bond will likely not be of concern. In fact, you might even view it as an opportunity to buy on the dip and average into your position.
Below I present details on five bonds yielding between 6% and 7%. For bonds offering yields in the 7% to 9% range, please read my article, "Building A 7% Fixed Income Portfolio - Part II." Assuming an equal face value is purchased for each of the ten corporate bonds presented in the two articles, the average yield would be 7.1055%. Of course, given that these ten corporates are just a small fraction of the 6%+ yields available to retail investors, a multitude of combinations could lead to a 7% average yield.
U.S. Steel's (X) senior unsecured note (CUSIP: 912909AF5) maturing 4/1/2020 has a coupon of 7.375% and is asking 102.50 cents on the dollar (6.96% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note B1; S&P rates it BB.
Peabody Energy's (BTU) senior unsecured note (CUSIP: 704549AH7) maturing 9/15/2020 has a 6.50% coupon and is asking 99.25 cents on the dollar (6.616% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Ba1; S&P rates it BB+.
Goldman Sachs' (GS) senior unsecured note (CUSIP: 38141GGM0) maturing 2/1/2041 has a 6.25% coupon and is asking 98.74 cents on the dollar (6.345% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note A1; S&P rates it A-.
Dean Foods' (DF) senior unsecured note (CUSIP: 242361AB9) maturing 10/15/2017 has a 6.90% coupon and is asking 101 cents on the dollar (6.68% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note B2; S&P rates it B-.
CenturyLink's (CTL) senior unsecured note (CUSIP: 156700AS5) maturing 3/15/2022 has a 5.80% coupon and is asking 98.298 cents on the dollar (6.03% 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 BB.
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 more information on any of these notes, including additional call or put features, 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 am long BTU.
Additional disclosure: I am long CUSIPs 912909AF5 and 704549AH7.