Showing posts with label Bonds. Show all posts
Showing posts with label Bonds. Show all posts

Wednesday, March 7, 2018

High Yield Bond - MoneyMadam's history

High Yield Bonds were enticing for income investors, including me, while we were in a low interest rate environment.

  • High Yield Bonds are not for beginners
  • Pay a steep discount
  • Risk is high

Since I started writing this blog about income investing,  I invested $81,670 in high yield bonds.  Each buy was for 10 bonds.  Eight different bonds make up the portfolio.  

TheMoneyMadam's High Yield Bond Portfolio

The table below lists the bonds I bought with CUSIP, coupon rate, and maturity date.  The portfolio holds only one of the eight bonds.  The others defaulted, were redeemed or tendered.  

It was a rocky and mostly unsuccessful venture.  My $81,670 turned into $72,949 not including income.  That is a 12% loss.  When adjusted for income the loss is cut to 4% but I don't like losing money.

If you read the dividend ideas on this blog you will see over the same time frame, I bought $875,687 worth of stocks.  The high yield bonds make up about 9% of the investments that I track in my portfolios. That alone is a good lesson. If you are going to take risk, you must keep it to a minimum.

It is a tricky business that requires even more due diligence than buying a dividend stock. Bonds are distressed for a reason and that is risk.

Entering a Bond Bear

As we leave the 35 year bond bull market and enter what I believe to be a 20 year bond bear market, high yield bonds are not as necessary even though they can be very rewarding (see Noble Energy Bond above.). 

I intend to ride the new cycle of increasing interest rates.  For average risk bonds I would like 5% for five years.  When bond prices decrease enough that I can get 5% for five years, I may change my mind and want more.  We will see.  

Since I believe interest rates are going up, I think there will also be high yield opportunities.  There is always some company that needs to pay just a little more to get financing.  It is our job as investors to find the right companies.

As I find bonds I like, I will write them up on this page and I will add them to the portfolio so you can measure how I have done.

M* MoneyMadam

Disclosure:  Long Cinemark Bond However since the price is above par, I am tempted to sell soon.  However, the next call price is $102.563 in April.  I may wait until that call date.

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Monday, March 28, 2016

Four Bonds for your consideration

Tuesday, March 29 update:   I did buy the Boise Cascade bond at par but in order to obtain a competitive bid minimum number of bonds is 50.

Original Post:

In this post I discuss four bonds for the average income investor to consider.

Interest rates are tough to predict.  Far smarter people than I have made fools of themselves trying to predict interest rates.  As you know bond values vary as interest rates vary.  When interest rates go up the value of a bond goes down and vice versa.  Provided that you buy your bonds at par or less, and hold them to maturity, these price variations are insignificant.

If you trade bonds, opportunities are abundant when interest rates are volatile, but we income investors do not trade bonds.  We invest in bonds to diversify our portfolio with an income instrument that is highly likely to deliver a steady source of income from interest and return our principle when the bond matures.  If you are a savvy bond investor you might even secure a capital gain if you bought your bond at a discount to par and receive par upon maturity or redemption.

Morningstar manages the bond data for Financial Industry Regulatory Authority (FINRA.)  I use their site to search for bonds and then I look to my broker, I use Charles Schwab, to actually find the bond's availability and trading price.

Bonds differ from stocks in that they are not as liquid.  You do not have a platform where you can place a limit order on a website and check in at the end of the day.  You need to have all your data at hand and make your decision to buy at the time the order is placed.  Schwab allows some bonds to be traded through their website but not all.  A call to the bond desk can provide better access to an acceptable trade.

Bonds also differ from stocks as you receive interest income for every day you own a bond.  Whereas with a dividend stock, you must own it on the ex-dividend date to receive the dividend.  You receive no income if you sell the stock prior to the ex-dividend date.
Interest Coverage Ratio

I have discussed D/E (debt to equity ratio) many times over the past years.  I have not discussed interest coverage ratio as much.   Interest coverage ratio is calculated by dividing EBIT which is earnings before interest and taxes by interest expense.   You can find this ratio already calculated for you on several websites but you can also go to the financial statements and find the data so that you can calculate it yourself. 

Interest coverage ratios of greater than 2 are what you want.

Four Interesting Bonds

ADT Corp, symbol ADT, has a bond that matures in 2023.  Alcoa, symbol AA, has a bond that matures in 2024. Boise Cascade, symbol BCC, has a bond that matures in 2020 and Embraer, symbol ERJ, has a bond that matures in 2022. 

I like to ladder my bonds by maturity.  The table below presents these bonds by maturity.  It includes the coupon, recent price, and yield to maturity.  Laddering takes some of the interest rate risk out of the equation.   These four bonds mature in 4 to 8 years.  Interest rates could be exactly the same or much higher in 8 years.    Although I would get my money back at maturity, I might have lost income opportunity if a 5 year U.S. Treasury is paying 6%.

A U.S. Treasury bond is safer than any of the four bonds profiled here.  So I would not want to commit my money for much more than 5-7 years.

The Table below lists these four bonds by maturity.

Issuer Fundamentals

A bond is only as good as the company that backs it.  I look for a stock with earnings, reasonable D/E ratio (debt to equity ratio), and decent interest coverage ratio.

The next table presents the issuer fundamentals including the CUSIP number for each of the bonds I may buy this week.

Further Discussion

ADT Corp. (ADT) has a thriving business.  They have earnings, pay a dividend and have revenues that are increasing; all good metrics.   However, their debt load is a bit heavy and that will way on my decision. 

Alcoa (AA) is in an industry that is under enormous pressure right now.  Although if you just look at D/E ratio, MSN Money ranks their D/E ratio at .75.   One of the peculiarities of their financial reporting is an interest coverage ratio of 1.5.  This is hard to believe as they had negative EPS during their latest quarter.  Looking back further earnings are all over the place.  Will commodity stocks like Alcoa come back?  Probably but the buyer of their bonds must understand there is risk and that is why the bond is trading at a discount.

Boise Cascade (BCC)  is the most solid of the stocks noted here.  Boise has solid revenue growth and reasonably good earnings although their most recent quarter showed some erosion in earnings.  The stock has a solid D/E ratio of .64 and interest coverage ratio of 4.58.  This is why BCC is trading right around par.   This is my favorite bond here, provided I can buy it at par or less. 

Embraer (ERJ) is a Brazilian company that trades in the US and follows most of our accounting rules.  D/E ratio of Embraer according to MSN Money is .94 which is respectable for a stock that requires a lot of capital.  Interest coverage ratio is hard to measure as their financials show no interest payments.   These facts may be suspicious and therefore I will probably not buy the Embraer bond unless I can get it at a significant discount. 

Consider one or more of these bonds for the income producing portion of your porftolio.

M* TheMoneyMadam

Disclosure:  May buy the ADT, AA, or BCC bond this week.

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Monday, May 5, 2014

Arch Coal Bond update

Speaking of bonds;  yes I sold the Alcoa Bond for $105.25.   Another junk bond I profiled a while ago is an Arch Coal Bond.    It is not doing as well as the Alcoa Bond.   But the Wall Street Journal has an interesting article on this bond today.    Below are the links to my original post and to the WSJ article.
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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, July 22, 2013

Retirement Income - Safe Withdrawal Rate

How much can you withdraw from your retirement and never run out of money? 


You tell me how long you are going to live and how much money you are going to spend each year and I can calculate a reasonable safe withdrawal rate.   But, no one has the answers to those questions.

Baby boomers who are about to face life without a paycheck have to figure this out. has a very good article on this subject; it is a quick review and point outs some of the many variables that soon to be retirees face.  It is worth your time to read it.

Portfolio Value – Withdrawal Rate

Two points in this article should make you think.   One is the effect your portfolio value will have on your safe withdrawal rate.   For instance if you retired in 2007, the value of your portfolio would have been much greater than if you retired in 2008.  Just one year difference and the amount of money you have to live on significantly changes your way of life.     I don’t think many investors really understand that point.   Most people think that since their portfolio has gone up about 10 percent every year since the crash in 2008 and it will continue to deliver those returns.    This is a foolish assumption.

The other point of emphasis is that a four percent withdrawal rate is a commonly accepted safe rate of withdrawal.   The experts have spent many hours forecasting the rate of withdrawal based on life expectancies and portfolio health.  This article is correct, a four percent withdrawal rate is accepted as a good rule of thumb.

Let Your Savings Do the Work

I have a different take on the matter.   I believe you can manage a portfolio of dividend stocks and bonds that can create four percent.   Therefore, if you can live on four percent, you need not ever tap your principle.   Moreover, it will not matter how much the investments are worth.  Your portfolio value can gyrate wildly and still you get the four percent.   Because your savings are doing the work, they create the necessary money you need to live on without having to dip into your retirement savings.   Check out my 2013 portfolio of dividend stocks.2013 Dividend Stocks - does not include bond or calls.

What Investments?

Stocks that pay dividends and bonds that pay interest are the investments that can deliver four percent for your retirement income.  In this blog I concentrate on companies that deliver consistent and ever increasing dividends.  Many of these companies also have covered call option income potential.  In addition I use carefully selected bonds.  

I use four criteria to select my dividend stocks.   I use covered call options on many of these stocks to create more income and to help me take profit and reinvest for more cash flow.  I also like below par bonds.  Bonds, however, are very expensive in 2013.   Yet, a good bond comes available now and then such as the Alcoa Bond I covered in my post on June 24, 2013.  

Follow an Investment Discipline

I find that ordinary investors can learn how to manage a portfolio of dividend stocks when they have a disciple to follow.   With experience, ordinary investors can learn to safely use covered call options to improve portfolio return.   Bonds are not difficult to understand, but they are difficult to find.    Ordinary investors should get to know the bond desk at their brokerage and work with them to find bonds that deliver greater income than a dividend stock; with spread out maturities, and that sell at a discount to par.  They’ll do the work for you, it is their job.  It is your job to decide which bonds to actually buy.   

To be fair, real estate, preferred securities, and annuities are income instruments that many investors use.   These are much more complex than stocks and bonds.   I do not cover those instruments in this blog.    

I know this much, a carefully selected portfolio of stocks and bonds can deliver enough income to make worrying about the “safe withdrawal rate” unnecessary.


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