Bonds Are Safer Than They Look
Yes, there’s plenty of bad news: credit downgrades, bond defaults and dividend cuts. The solution is to find workarounds.
During a tumultuous past few months, financial markets somehow kept their bearings. Skeptics insist this is a mirage and that an echo of March’s crash is nigh. I contend the run of positive returns is legitimate, but my bullishness is not unrestrained. There is no denying the disruptions from 11% unemployment, travel bans and the potential dangers of attending school or using public transportation.
But my job is to interpret the investment scene and guide you to secure interest and dividends. (By the way, to all who asked where I’ve been the past couple of months: I took a break to contemplate retirement because I turned 65 but decided to carry on.) Although we’re seeing more credit downgrades, bond defaults, and dividend cuts and suspensions than before the pandemic, these impairments are not so widespread that you cannot work around them. For every supine sector, one or two more are in full recovery or at least steady, and they beat zero yields from the bank. My take on key sources of income:
Dividends. Since March, cuts or suspensions hit daily. When Annaly Capital Management (symbol, NLY)—a high-yielding security whose sole appeal is dividends—cut its payout by only 12%, the shares rallied. Aside from mismanaged outfits such as Boeing and Wells Fargo, and outside of oil and gas, travel, and retail, painful cuts are rare despite the drastic economic contraction. Even at 27,000, the Dow Jones industrial average still yields 2.4%. Yes, raises are shrinking as earnings and growth prospects wither. ADP, Caterpillar (CAT), Illinois Tool Works (ITW), Sherwin Williams (SHW) and other spectacular 2019 dividend boosters will not repeat those leaps in 2020 and 2021. But you will get some fair incremental raises. Dividend-growth strategies still make sense—but pass on Big Oil.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
High-quality corporate bonds. Despite a bulge of new issues as the pandemic spread and companies went crazy raising cash, demand for bonds still overwhelms supply. Combined with low and sticky interest rates, this is an ongoing bonanza for segments such as A-rated to triple-B-rated U.S. corporates. The S&P index of BBBs has a total return of 21% since its March bottom and 8.6% for the year to date. The yield spread between BBBs and Treasuries in early August stood at 1.8 percentage points. That gap is wider than it has been almost continuously from 2016 until early 2020, signaling more room for appreciation if you either own a good bond fund (or two) or hold individual bonds in stable industries with coupons of 5% or 6%.
Municipals. There are problems implied by shortfalls in local tax revenue and falling big-city property values and office rents, as well as the cancellation of conventions and sporting events. But heavy demand, the absence of valuable personal tax breaks and the promise of help if needed from the Federal Reserve are all strong supports. Just apply the normal rules: Avoid bonds from poor or shrinking jurisdictions; lean toward debt for essential services, such as schools and water and sewer lines; and either buy bonds singly or use actively managed funds instead of index-based exchange-traded funds.
Real estate and utilities. Property real estate investment trusts come in 16 subsectors, and the carnage is still concentrated in New York City offices and in retail and lodging. You’re getting paid everywhere else, helped by REITs refinancing their debt at lower rates. Utilities are weak because power demand is down. Plus, the group entered the year touching the sky. But most dividends are secure. And, as we know from previous slumps, income is an antidote to the worst damage.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Holiday Office Party Taxes: Know Before You Go
Tax Tips The IRS could tax your gifts from Christmas raffles, Secret Santa, and White Elephant. Here’s how.
By Kate Schubel Published
-
2025 Tax Reform: Will the SALT Deduction Cap Be Repealed?
Tax Deductions Some lawmakers say it’s time to end the $10,000 cap on state and local tax deductions.
By Kelley R. Taylor Published
-
Dividends Are in a Rut
Dividends may be going through a rough patch, but income investors should exercise patience.
By Jeffrey R. Kosnett Published
-
Why Investors Needn't Worry About U.S. Credit Downgrade
Fitch Ratings The United States saw its credit rating downgraded for just the second time in history, but experts aren't worried about the long-term damage to stocks.
By Dan Burrows Published
-
Municipal Bonds Stand Firm
If you have the cash to invest, municipal bonds are a worthy alternative to CDs or Treasuries – even as they stare down credit-market Armageddon.
By Jeffrey R. Kosnett Published
-
High Yields From High-Rate Lenders
Investors seeking out high yields can find them in high-rate lenders, non-bank lenders and a few financial REITs.
By Jeffrey R. Kosnett Published
-
Time to Consider Foreign Bonds
In 2023, foreign bonds deserve a place on the fringes of a total-return-oriented fixed-income portfolio.
By Jeffrey R. Kosnett Published
-
How to Find the Best Utility Stocks
When seeking out the best utility stocks, investors should focus on companies with scale and income potential.
By Jeff Reeves Last updated
-
The 5 Safest Vanguard Funds to Own in a Bear Market
recession The safest Vanguard funds can help prepare investors for continued market tumult, but without high fees.
By Kyle Woodley Last updated
-
5 of the Best Preferred Stock ETFs for High and Stable Dividends
ETFs The best preferred stock ETFs allow you to reduce your risk by investing in baskets of preferred stocks.
By Kyle Woodley Last updated