Corporate Bonds, The Safest Source of High Income Today
Interest-Rates / Corporate Bonds Aug 16, 2010 - 06:37 AM GMTBy: DailyWealth
Tom Dyson writes: What's the safest way to earn high income right now? You buy bonds...
American companies are absolutely loaded with cash. Take Microsoft, for example. It has $35 billion in cash and only $6 billion in debt. Accountants would say Microsoft has a net cash position of $29 billion.
Microsoft isn't the only company with a huge net cash balance. Cisco has $25 billion in net cash. Apple has $24 billion in net cash. Intel has $16 billion in net cash. Dell has $6 billion. eBay has $5 billion. Oracle has $4 billion. Gap has $2.5 billion in cash...
According to the Wall Street Journal, corporate America now holds the largest cash balance in history. This is great news for corporate bond investors.
Profits, revenues, dividends, or growth forecasts are important if you hold shares in a company. But they don't matter to bondholders...
A bond is a loan. When you buy a bond, you are lending money to the issuer of the bond. Governments issue bonds, companies issue bonds, even individuals issue bonds sometimes. While you hold the bond, you receive interest from the issuer. When the bond matures, you get your money back. (And you don't have to wait for maturity to get your money back if you don't want to. You can sell it to someone else at the market price.)
Unlike stock investors, bondholders have no claim on a company's profits. They're entitled to an interest payment and they're entitled to get their money back in full at the end of the loan. In this way, the primary driver of a bond's value is the solvency of the issuer.
A bond issued by a billionaire with a pile of cash in the bank, for example, will trade at full value. But a bond issued by a bankrupt gambler will only be worth a fraction of its face value.
This is why profit warnings, earnings misses, and revenue declines don't matter to bondholders. All they care about is that the issuer has a strong balance sheet.
When a company holds a large cash balance, there's no way it can go bankrupt. Even if Microsoft never sold another piece of software and went out of business, it could never go bankrupt. Its giant cash pile is more than enough to pay off all its debts.
In other words, if you hold a bond in a company with a huge cash balance, you have nothing to worry about. With corporate America holding a record cash balance right now, bonds are as safe as they've ever been, generally speaking, and you can buy many of them without any fear of insolvency.
After insolvency risk, price inflation is the second biggest concern of bondholders. You receive the same payment from a bond every year. But if prices of the things you buy are rising, you're losing purchasing power. Fortunately, there's no inflation right now. The latest CPI numbers came out on Friday. The general price level is rising at about 1.2% a year. That's not much. And given the imbalances in the economy, I'm almost certain inflation will turn to deflation soon, which will be a huge boost for safe bonds...
So how do you buy bonds?
"Stock market bonds" are the easiest bonds to buy. Around 1,000 bonds and other fixed-income investments trade on the market alongside stocks. These bonds have ticker symbols just like stocks. And you can buy and sell them through any discount broker.
For a list of available stock market bonds, use Quantum Online. This free website lists every stock market bond. I searched Quantum Online last week and I had no trouble finding safe bonds issued by cash-rich companies yielding anywhere from 6% to 9%. For a bigger selection of bonds, visit your broker's website. You'll find a bond screener. Yahoo Finance also offers a bond screener here.
One bond I like is the Markel 7.5% 2046 bond, with the CUSIP number 570535203. (The bond market identifies every bond with a unique nine-digit number called the CUSIP.) This bond has a face value of $25 and pays $1.875 per year in interest.
I recommended this bond to my 12% Letter readers last year. We're up 19% so far and are earning 8% every year on our buy price. Markel will return our money in full on or before August 22, 2046. Markel is a cash-rich insurance company, so there's almost no risk it will default on these bonds.
The Markel bond is over my buy price of $25 right now. But if it dips below $25 – or if you find another bond you like – call your broker. He'll want to know four things: the coupon, the maturity date, the issuer, and the CUSIP number.
If you were buying the example above, you'd say "Please get me the 7.5% Markel bond due 2046. The CUSIP number is 570535203." He'll contact one of the large bond trading firms and get the bond for you.
With American companies holding such high cash balances right now, bond investing has never been safer. Check out Quantum Online for stock market bonds or ask your broker for help.
Good investing,
Tom
P.S. One of the world's greatest bond investing tools is my colleague Mike William's bond advisory, True Income. I've never seen anything like Mike's ability to find bonds that offer both large, safe income payments, but also healthy upside gains. You can learn more about how to access Mike's insights here.
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