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If dividends earnings increases, after 10 price you originally paid,
paying out 6%. That means that for the second J0 years of the bond's
life, the stock will actually be paying more. And that's not even
counting any capital gains you knight earn from the stock's price
appreciation. This dismal lack of growth is the reason bonds are
dangerous investments for retirees.
Making bonds sound so
bad that you may be asking yourself why it ever makes sense to buy
them. Well, actually there are several reasons. The most important is
that a chunk of high-quality long-term bonds adds ballast to a
portfolio. Over the course of a business cycle stocks and bonds rise
and fall at different times, so nailing them together will reduce the
volatility of a portfolio no matter what the economy does. Further, in
certain circumstances bonds can be attractive for other reasons: still
be l realize I'm years while the bond will rise roughly in line with
its yield will be 7.1% of the Assuring that the stock's up your
average yield. Say you want your portfolio to have an average yield of
at least 4%.Then you spot some fantastic growth stocks.-the catch is
that their yields are only around 2%.What do you do? Do you pass them
by because they will pull your average yield down too much? Well, one
solution would be to buy some high-quality corporate bonds or bond
funds paying 8%. For every $1 you put in such bonds, you could spend
$2 on growth stocks and still maintain an average yield of 4%.
Adding bonds to
a Long-term bonds and certain points in the over long stretches
zero-coupon issues are attractive at their problems economic
cycle. Whatever compelling buys at certain points in an economic
cycle. The basic principle here is that bond prices rise when interest
rates fall and the longer the term until the bond matures, the
more the price will swing. Gates typically peak late in an economic
expansion and can then decline sharply after a recession finally
begins.
Investors who buy
long-term bonds at a rate peak can earn of time, bonds are
(counting 170th interest and following two or three years. where's
also a special type of bond known as a zero-coupon issue because it
pap no cash interest-that can be au even bigger bonanza when rates
fall. just
like the more familiar us savings bond zero-coupons are sold at a
discount to face value. Their terms make these issues respectably
sensitive to rate changes. for example long-term interest rates fall
by one percentage point over the next three years, 10-year Treasury
zeros would gain a stunning 50% gains over the 25% to 35% are good
buys in recessions.
Investors consider
Normally, when high-quality corporate issues. Bonds which are at the
other end of- the quality scale-are sometimes appealing for very
different reasons. The theory behind junk bonds is that companies
ogress than investment-grade quasar can raise money in the bond market
more cheaply eau they can borrow some banks. By cutting out the
corporate bankers, these companies jean afford to pay relatively
generous yields on their bonds so in theory everyone comes out ahead.
for example, when Treasury bonds are yielding 6% a junk-rated borrower
taught be able to sell bonds with a 9% yield investors who bought an
assortment of these bonds would recognize that a few issuers knight
default, but even after subtracting two points or so to cover
defaults, an index of-junk bonds would return a point more than
Treasuries.
and supersede Treasuries bonds, they think about Junk bonds great-and
fins well supported by academic studies. There are just two catches.
First, it's true only if you own a wide variety of bonds so that you
are playing the averages.
1- you own only five bonds for instance and one of-them gets into trouble
you could take a second the rest of-junk bonds move up and down with
the economy 'Invests when business is good and dump bonds whoops bid
the prices up increases the likelihood of a default.
Investors who
want to add some high-yielding junk bonds to their portfolio should be
sure to follow these three rules:
1. Never put more than 10% of your money in junk.
2. Buy through a mutual fund to assure that you own a large enough
assortment of bonds that have been checked out by analysts.
3. Buy in a recession, when junk bond prices are likely to be
depressed, and plan to hold for two or three years into the recovery
K Take a look at tax-exempt bonds if you are in a top tax bracket.
Interest on state and municipal bonds is generally exempt from federal
income tax-and also from state and local taxes if you live in the
state where the bond was issued. That means if you are in a high tax
bracket, the yield on money may be more attractive than what you would
keep after taxes from the interest on a regular bond. For instance, if
Treasury bonds are yielding 6% and munis are paying 5.4%, an investor
in the 31% tax bracket would come out ahead with the munis.
After federal income tax, the 6% Treasury yield would be worth only
4.1%, more than a percentage point below the munis yield. To top a
5.4% tax-exempt yield for a bondholder in the 31% bracket, a taxable
bond would have to pay 7.8% (this figure is known as the taxable
equivalent yield).
Munis have a few
drawbacks: most of them don't trade actively, so you can't always get
a good price when you buy or sell; some of them aren't of good credit
quality, so you need expert advice on selecting bonds; and issues with
maturities of less than 10 years are often sparse, so you may have to
tie up your money for 20 years , in turn, means that you run head-on
into the fundamental problem of all long-term bonds-you face more than
a decade of inflation with no corresponding increase in the payout you
receive. Still, conservative investors in high tax brackets may be
better off buying minis than taxable for the portion of their
portfolio that they need to put in long-term bonds. |
