A “Secret” Income Source
I have a few (not-so-secret) identities.
By day, I analyze stocks and provide income ideas for my readers. I’m known as the dividend guy because of my international bestseller Get Rich with Dividends, which has been published in four languages.
By night, I am singing in a rock band or ring announcing world championship boxing matches on TV.
I know, it’s weird.
What many people who follow my dividend work may not know is that I’m also a big advocate of investing in bonds, especially now. Most investors don’t own individual bonds, but they absolutely should.
Bonds are sold in increments of $1,000. What’s great about bonds and so different from stocks is that you know exactly what a bond will be worth on a specific date. On the day the bond matures, you will be paid $1,000 – no matter what you paid for it. Maybe you paid $1,000 for the bond and collected interest for several years and then simply got your money back.
Or maybe you bought the bond at a discount and paid only $850, collecting interest until and then receiving $1,000 at maturity. So you’d earn a $150 profit in addition to the interest.
For years when interest rates were at rock bottom, it was tough to find attractive bonds because the interest was so low. You had to take on a good amount of risk to get any kind of yield. At one point, in order to earn 5% on a bond that matured in a few years, you had to invest in low-rated junk bonds.
Today, you can earn 5% or more on very safe investment-grade corporate bonds. And if you are willing to take on more risk, you can easily earn 7% to 9% or even more on non-investment-grade bonds.
Keep in mind that even non-investment-grade bonds rarely default, especially if they’re not the lowest-rated bonds. So unless you’re choosing the junkiest of the junk bonds – I’m talking about the rusted-out shell of a 1975 Ford Pinto of bonds – you can feel very confident you’ll get your money back and finally earn a decent amount of income.
Right now, I recommend investors buy bonds with maturities in four years or less. That way, their money is not locked up for a long period of time. I also recommend that you buy bonds only with the intent of holding until maturity. If a bond’s price goes up, you can always sell at a profit if you choose. If it doesn’t rise, you simply collect your interest and then your $1,000 per bond at maturity.
There are lots of interesting opportunities in the bond market these days.
For example, you can earn nearly 6% annually through an April 2024 bond from Ally Financial, a household-name financial services company. The bond is rated a safe BBB- by S&P Global Ratings.
Even safer, the A- rated Credit Suisse bond that matures in August 2024 earns 7.5% annually.
If you’re willing to take on a little more risk, a BB rated bond offered by QVC, maturing in April 2024, earns you 9% annually. And one from the same company with the same rating but maturing in February 2027 earns more than 13.5% per year.
Stocks come with no guarantee that they’ll earn 13.5% per year, 9% or even 6%. But these bonds basically do. As long as the companies don’t go bankrupt, bondholders will get paid $1,000 per bond at maturity.
It’s a great time to be a bond investor, and I expect it to get even better over the coming months as rates continue to rise and bonds offer investors even higher returns.
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