Showing posts with label Bond Interest Income. Show all posts
Showing posts with label Bond Interest Income. Show all posts

Sunday, May 4, 2014

Selling Alcoa Bond

Alcoa (Photo credit: Wikipedia)
I am often asked to write about stocks that I sell.   I don't sell any stocks in the model portfolios I follow on this web/blog, and I rarely sell stocks in my own portfolio.    This post is to inform you that I am going to sell the Alcoa Bond I profiled last year.    Here is
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Monday, June 24, 2013

BONDS; Alcoa bond for your retirement

Alcoa (Photo credit: Wikipedia)

You know I never advocate bond funds, yet, often times individual bonds fit nicely into an income investor’s diversified portfolio.   In this post, I profile a bond I bought yesterday. 

I want to remind you that I like bonds with short maturities, that cost less than par, have an interest rate that is better than a dividend, and whose underlying company has a good interest coverage ratio.  

Bonds with short maturities:

When you buy bonds, your goal is to build a portfolio of bonds with varying maturities.  Long bonds, those that mature in more than ten years, cost too much and do not pay enough income to make such a commitment.  You tie up your principle for too long a time. 

Short maturities, those between three and then years, are the sweet spot of bond investing today.  Everyone is worried that interest rates will explode over the next few years.   If that comes true, the value of bonds that you buy with coupon yields that are less than government treasuries will go down.   You will not want to sell your bond at a discount so you should hold it to maturity when you will get back your principle.   You can then reinvest your principle in another bond with a higher coupon yield.    If you keep the maturities short, you tie up your principle for less time and you can take advantage of rising interest rates.

Bonds priced at less than par:

Most investors are familiar with the concept of total return when we talk about buying stocks.  You expect dividend income but you also hope your principle will increase over time.   When you buy a bond at par and hold it to maturity, you will get back par.   Your total return is only the value of the interest payments.   

If you buy a bond that costs more than par and hold it to maturity, your return is even less than the value of the interest payments because you will get back only par which would be less than you paid.    You can see why I never buy bonds at a price greater than par.

If you buy a bond at a discount and hold it to maturity, your return is a combination of the interest payments and the increased value of your principle.  You get the capital gain difference between the discounted price you paid and par.   Sometimes, (and this happens more than you may think) the value of your bond increases enough that you can sell it at greater than par.  In circumstances of that type, your return includes the interest received while you held the bond and the capital gain.

Interest coverage ratio:

If you have not yet familiarized yourself with “interest rate coverage ratio,” you should do so now.   Interest coverage ratio is simple to find.   I use MSN Money to find this the interest coverage ratio of the company that has issued the bond.  Interest coverage ratio is a measure of how well a company can pay its interest payments.    Later in this post, I have provided a link to the MSN site.

Alcoa Aluminum Company – April 15, 2021 bond

Alcoa, symbol AA, is a dividend stock but their bonds are a more compelling investment.  AA issues bonds periodically and the bond I bought today (June 24, 2013) matures on April 15, 2021; this is just under eight years until maturity. 

This bond pays a coupon yield of 5.4%.  It sells at a discount; I paid $96.291.  At this price, the yield is about 6%.   In addition, if I hold the bond to maturity I will get back my principle plus $3.709.   

This bond is rated BBB-.   I put very little faith in the rating agencies; I do my own homework and I like to use the interest coverage ratio of the underlying company to determine if that company will be able to pay the interest and return to me the principle.   In the case of this bond, the interest coverage ratio of AA is 36.59.  This means the company has a good chance of paying interest to the tune of 36.59  times what they need to cover the interest payout.  This is an excellent margin for this company and makes the bond compelling to me.   If you want to see the data on MSN click here for the link.

AA 4/15/2021 5.4%
CUSIP 013817AV3
               $    100.000
               $      96.291
Coupon Yield
Yield to Maturity
AA D/E ratio
AA Interest Coverage Ratio

You need to know the CUSIP of the bond in order to buy it.   Many brokers, I use Schwab, will have these bonds in their inventory.   If you do not see this bond on your broker’s website, call their bond desk and ask for a price using the CUSIP.   See the table at right for this bond’s details.


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Monday, June 3, 2013

BONDS Cliffs Natural Resources CLF Bond for your retirement

Strategic Risk - Euro Bonds

It has been a while since I profiled a bond.   Today, I added this bond to my portfolio.  I like to shop for bonds on Mondays and I like a bond that is selling at a discount, is less than 10 years in maturity and is backed by a company with decent fundamentals.  Let’s look at how Cliffs Natural Resources’, symbol CLF, 2020 bond meets my needs for investment income.

Bonds priced on Monday:

Unlike stocks, bonds are a smaller universe for the ordinary investor.  Prices tend to be set on Monday.   This is when bond buyers go shopping.  So often in the past, I would find a bond I liked and by the time my client made a decision to buy, the inventory was no longer available or if it was the price increased and the yield decreased.

FINRA (Financial Industry Regulatory Authority) has a bond search feature.  It used to be quite good but they have revised it and I find it useful but not as rich as it used to be.  MarketAxess has a corporate bond edition (MarketAxess website) that individual investors can use to see a list of investment grade and high yield bonds.   Monday’s are a good time to look at their corporate bond edition.

In order to buy a bond, you have to know the “CUSIP.”  You can search your brokerage account but they tend to have a limited supply of bonds available to individual investors and they rarely have high yield bonds available online.   If you know the CUSIP, you can enter it to see if the bond is in their inventory; some brokers like Schwab will let you buy online.   Your alternative is to call the broker’s bond desk and ask them to shop for the particular bond.  They will get a price on the open market and you can decide if you want to buy the bond.

Buy at a discount:

Bonds are priced at what is known as par value or $100 per bond.  It is a little confusing because 10 bonds actually cost $10,000 which would be $1,000 per bond.  For the purpose of buying and selling, par is $100 per bond.    At par, the coupon yield is the effective yield.  A five percent coupon will pay you five percent every year until the bond matures; when the bond matures you get back your invested principle.

I like to buy at a discount which means the yield is higher than the coupon.   If the bond costs me $90 instead of $100, the five percent coupon is a yield of 5.55% over 10 years.  When the bond matues I also get a capital gain because I will get back $100 not just the $90 I paid for the bond.

If you buy at a premium, let's say you pay $110.00 for the bond, your yield will go down to 4.54% over 10 years and you will get back only $100 when the bond matures.   I do not like that kind of return.

Cliffs Natural Resources (CLF) 2020 bond:

The CUSIP for this bond is 18683KAB7.   The bond pays a coupon of 4.8%, it matures October 1, 2020 and today I paid $96.523 for each bond which translates into a yield of 5.38%.

I like a bond that matures in 5-10 years.   This bond matures in seven years and about four months.    Interest rates will be volatile during this time frame.  Some days the price of this bond will be up and other days it will be down.  As long as the company is solvent, it should both pay the coupon to me (bondholders are paid every single day they own the bond … unlike dividends) and the company should return $100 to me when the bond matures.

I cannot predict what interest rates will do.   It could be that in seven years, when this bond matures, I can replace it with a bond that pays 10%.   Do not laugh at that prospect because this happened in the past during the hyperinflation period in the 1980’s.   Equally possible, I may not find a bond to replace this one with a yield that is as good as 5.38%.   You have to weigh how much you need 5.38%.   Right now, I need that yield and I like the potential capital gain.

CLF, had one terrible quarter where they took loses.  They are in the metals, mining, and coal business and the coal part has not been pretty.   Yet, fundamentally, I find this company a pretty safe bet.   Their book value is $37 per share yet it trades at $17.92 per share.   Their D/E ratio is .60 which is very healthy.   Finally, their interest coverage ratio is 3.4. 

Do you own homework, and then decide if a bond of this type will fit into the income producing portion of your portfolio.


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Monday, July 25, 2011

Stocks or Bonds: JNJ a study!

logo Johnson and JohnsonImage via Wikipedia
JNJ bond or stock – the income investor’s dilemma!

                With all the economic problems facing the world, visiting this subject is appropriate.  Are bonds safer than stocks?  Should retired people, a major category of income investors buy a bond or a stock?  Are we going to have a financial meltdown that would make you want to own only cash which generates no income?  The Gold and Silver stuff is hard to eat and what a pain to make change.
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Wednesday, June 8, 2011


          It has been said the three most important inventions were the lever, the wheel and fire.  In personal finance, use of the lever provides significant advantage.
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Sunday, June 5, 2011

Texas Municipal Bond - income & profit

          Municipal bonds are essential investments in the taxable accounts of income investors.  While all bonds including municipals are expensive; finding a good one requires quite a bit of work; opportunities for both income and profit do emerge now and then.

          I profiled an insured municipal, transportation bond issued by the State of Texas on January 20, 2011. (see Original Post)
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Friday, June 3, 2011

Dow down 700 points in 5 weeks; should the income investor care?

                Income investors care about the Dow Jones Industrial Average because many of the quality, dividend producing companies we own are in this average. 
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Wednesday, April 27, 2011


                We income investors are getting the worst deal possible as far as inflation goes.  We are stuck in an inflation sandwich.  We suffer increased expenses without a similar opportunity for increased income. We are sandwiched between reduced income and increased expenses just at the time in our lives when you take care of kids and parents.   Inflation is the cruelest of taxes.
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Friday, February 11, 2011

Income Investor First Steps

First step for new (young) investors: understand that investing means you can be a lender or you can buy an ownership position in something. This blog post will concentrate on being a lender.
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Thursday, January 20, 2011

Municipal Bond treasures in the trash heap

Municipal bonds are an unloved category and justifiably since almost every government and public entity seems to be in financial trouble. Yet in every trash heap is a treasure for the patient investor.
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Thursday, January 6, 2011

Bond Help 2

Investing in bonds is a subject of some importance today.

Information on bonds has been difficult to find. I remember when I started investing I asked our Merrill Lynch broker to give us a list of bonds.  We wanted to buy a bond; interest rates were 18%.  Our broker provided one,  yes one and only one bond to consider.

Today you can research bonds you may want to buy.  If you want to lend your money to a company, you should select a company that is solid.  Try to find a company that meets our four criteria for investing.  Then use the Securities Industry and Financial Markets Association website to gather information on the price of corporate bonds.  Their site is called

If you want to buy municipal bonds because you want the tax advantage, you have more challenges.  Researching the credit worthiness of a State, City or County, is not easy. Use the
Municipal Securities Rule Making Board website for information on municipal bonds. This website is called

We hear about municipal bonds defaulting, we here about foreign government bonds defaulting, we know GM defaulted, we are concerned that the United States could default; bonds are on our minds.

You know already that I absolutely reject bond funds in my cash flow strategy.  Holding a well financed bond to maturity holds very little risk.  Pools of bonds carry more risk.

Someday bonds will be an attractive asset to include in your cash flow strategy and these two resources will help you select the right bond.

Very Truly Yours,
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Wednesday, December 15, 2010

Bond Funds

Bond funds are mutual funds that lend their money to corporations or governments. Lately everyone seems to be buying bonds funds. Because you need less money to begin investing in bond funds than you do to buy an individual bond, a bond mutual fund may seem to be a good choice.

I cannot state strongly enough how much I do not like bond funds in this economic environment.

First, mutual funds are not my first choice for investing; although, I have to admit that I too have invested in mutual funds when it is not feasible for me to invest directly. Of all mutual funds, I dislike bond funds the most because you are never sure when or even if you will get your principal returned. More of your invested money goes to expenses than with an individual bond, and you lose all control over when to sell.

You see bond funds hold groups of bonds and they buy and sell them based on changing economic conditions. Memorize this principle: when interest rates go up the value of bonds goes down. No exceptions exist. Since interest rates right now are about as low as they can get, bond funds are very expensive and pay relatively little for the risk you take. It is true that the price of an individual bond will fluctuate as economic conditions change; however, a well-selected bond will pay back your principal upon maturity. With a bond mutual fund, you have no such expectation.

I fear for those who have poured their money into bond funds for safety or fixed income. This is no way to invest. The economy may be in deflation, interest rates will stay low, and the bond fund holders will not lose any money. However, I have been in this business too long to accept the premise that interest rates are going to stay low forever. When they do go up, this will be the next bubble to burst. Why take that risk when as an investor you can very easily buy one or more quality bonds for a relatively small amount of money.

Once you have saved about $2,000, you can buy a bond. Use my five step-planning guide to help you develop a comprehensive investment plan. Figure out how much money you want in bonds, stocks, or real estate. If you decide lending your money is a good investment for you, then please buy individual bonds rather than bond mutual funds.

Periodically, I review bonds that I think are good buys. Read my blog often to help you decide which bonds to buy.

Very Truly Yours,


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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,

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Tuesday, November 30, 2010

Global Bonds & The Income Investor

Global Bonds are enticing because Income investors must chase yield to survive. Low risk income does not exist today and one can understand the allure of global bonds. However, we income investors, with few rich cash flow opportunities must be careful to evaluate the risk of our loaning our money.

My job is to teach you about income investing and bonds should play a role. Global bonds with their high yields are indeed enticing. We know that US bonds are way too expensive. Quality corporate bonds are also expensive. One could argue that municipal bonds are on sale but only if you are sure the taxpayer will pay that bill.

Global bonds need to be evaluated with the same prism for all bonds. All bonds have at least two risks. One risk is will the issuer pay back your principal. For instance, I loaned money to GM General Motors and with all my experience, I was very sure that even in a bankruptcy situation, some of my principal would be return but that is not to be. You must answer this question. Do you think a foreign backed bond with a higher yield than you can get in the U.S. will pay back your principal?

Another risk is ability to pay the interest. Interest coverage ratio is a very transparent measure to determine if a corporation has enough income to pay the interest on their debt. Global bonds have the same responsibility but less transparency. Basically the question is, do you think Global bond issuers which may be governments or companies will create enough income to pay you interest on the money you loaned them.

A third risk exists for global bonds and that is currency risk. You do not have to be a global economist to understand the value of the dollar varies in relation to the Euro and other currencies. Do you lend them dollars in exchange for Euros or other currency?

Simple investing means you reduce your risk to the fewest number of issues and for my money global bonds have one more risk than I need to take.

I always recommend going with what you know. If you know currency exchanges and foreign companies and governments and you do your research and then find a bond you love, go for it.

For me, I will wait until bonds provide a better value. In the mean time it is dividend machines and covered calls for my income portfolio.

Very Truly Yours,


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Wednesday, November 24, 2010

Municipal Bonds & The Income Investor

The long held practice of using municipal bonds to create tax advantaged income is coming under scrutiny.

As we have previously discussed, municipal bonds have been excellent investments for money held in taxable accounts. They are not appropriate for tax deferred accounts like 401K's, IRA's, or other retirement accounts. However, many people have money in taxable accounts and to maximize their net income and reduce their taxes on income, they use municipal bonds.

In my career, I have been through at least one very well known municipal bond crisis and that was the bankruptcy of Orange County, California in 1993. In spite of this crisis, interest and principal on these bonds was paid. This is a confidence builder. But, does that confidence exist today? Will holders of bonds from Harrisburg, PA fare as well?

Lending your money to a municipality is a dicier venture today than even in 1993. We are in an illiquid and inefficient market. A few states such as Indiana have made progress toward balancing their budget and therefore a state like Indiana can provide tax advantaged income that is relatively safe. The BAB, build America bonds, which are taxable and not guaranteed by the U.S. Government complicate the issue even more.

Overall, the supply and demand of municipal securities is out of balance and this means you must settle for a little less income in exchange for safety. When possible, purchase bonds that are insured and those backed by the taxing authority of the state rather than the source of income coming from bridge tolls or hospital revenues or sports arenas.

I like simple investments and municipal bonds are not simple. However, using the SIFMA site, you can learn a lot about the bonds by simply entering the CUSIP number. In addition, your brokerage will be able to provide you with even more information.

I remind you to never buy bonds funds when the risk of rising interest exists and it exists today.

So tread carefully and know everything you can about the State, County, or City to whom you are lending your hard earned money.

Happy Thanksgiving & Very Truly Yours,


Next week another dividend machine idea!

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