Saturday, December 11, 2010

Bonds for Cash Flow

Bonds are an important part of the income investors' strategy. However, today taxable bonds are very expensive. Tax-free bond income for highly taxed families who have savings in non-retirement accounts are not as expensive and the reason is they are risky.  Tax-free bonds are municipal bonds and many municipalities are broke so the guarantor or your money is fragile.

However, when you buy individual bonds you create cash flow.  We take what we can get and we always try to buy individual bonds at par which is the price they will pay you back when the bond matures, or at a discount.  Bonds sell at discounts for many reason which I cover in future posts. 

For income investors who want to create cash flow, bonds serve two duties.  First, well selected bonds almost always pay back your principal.  Note that over my 35 years I have had only 1 bond default and that is a GM (General Motors bond.)   Second, you accumulate cash from your bond income and that cash allows you to  buy more bonds, or add income-producing stocks.

I have never invested in a bond fund nor could I ever recommend it to my clients when I was in that business.  Bond funds provide you with no control.  You never know if you can hold a bond to maturity.  You have enormous risk if interest rates rise since the value of the pool of bonds you own in a fund or ETF reduces in value when interest rates go up.  Whereas, if you own an individual bond, the value may vary but if you hold it to maturity, you will, in most cases, get back your money.  As a matter of fact, if you own a bond fund or ETF, please sell it and sell it now!

Think about the definition of an income investor. Contemplate a move in that direction and take the money to the bank.

Remember to lend your money to a company that makes money, shares that money with you in the form of a dividend, increases that dividend periodically, and has a strong balance sheet. If you lend your money to a government, make sure they are highly likely to pay you back.

Bonds should be part of your income investment portfolio, but be patient and buy bonds at par or at a discount. Buy bonds from good companies or good governments.

Keep reading this blog and when bond opportunities are available to the average investor like you and me, I will alert you.

Right now, dividend producing stocks I call dividend machines are the choice investment for cash flow.  Every Monday, I provide a new idea.  Check in often.


Very Truly Yours,

TheMoneyMadam