The Benefits of Bonds

Stocks are really only worth what you can sell them for in the market, or what they’ll pay you in dividends over time. Neither is guaranteed.

There is no guarantee that when you go to the market other people will pay what you expect for your stock. They might not pay you anything.

There is no guarantee that you’re going to receive the dividends you expect. Dividend policy is up to the board of directors. And most simply don’t care about shareholders.

The best time to buy stocks is when they’re extremely cheap or have proven track records of paying dividends – and this doesn’t happen often.

However, with bonds, you’re guaranteed to get some percentage of your invested capital back and to receive a dividend.

A bond is nothing more than a loan. It’s a loan that you make in the form of a security. Say you buy a typical £1,000 bond. That means the company agrees to pay you back your £1,000 in full at a certain point in the future. It can be a short-term loan or a longer-term loan. There are all kinds of different terms and periods. The most important part is that at the end of the term, the company – by law – is required to pay the full price of the bond as it was underwritten.

Sometimes you can find bonds selling for a discount. The discount can be 10% but it can be as much as 60%. That’s like buying a £1,000 for £400. A pretty good deal if you ask me! These are referred to as discounted corporate bonds.

The amazing thing about these discounted bonds is that you have a claim for it to be repaid in full. The company has to pay you back or else it goes bankrupt and all the assets the company has are sold off and distributed to the bondholders.

The idea is to find bonds where the assets can easily cover the bondholders so that bankruptcy does not have to occur.
So when you choose the right bonds, you’re basically guaranteed to get a good return on your investment.

The second advantage of bonds is they pay a fixed coupon. This is the same as a dividend from stocks. Look for bonds paying at least 4% (more difficult to do today due to interest rates being so low). Bonds are good for fixed income you can guarantee on. Although beware, nothing in life is guaranteed except death.

The idea is to buy bonds where the company has plenty of assets available to repay their bondholders without having to go bankrupt. Buy them when selling at a discount and look for good coupon yields.

If you follow this simple advice you will do well in the long run.

 

 

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