The Best Corporate Bonds to Consider for an Investment in 2017
Income investors tend to forget about corporate bond investing and only focus on stock market investing. I understand this, because at times it is hard to find information regarding corporate bond investments. That’s why the focus of this article is the best corporate bonds for 2017.
The corporate bond market is an important area to consider for an investment because there are so many great opportunities. Also, the bond market in the U.S. is much larger than the stock market. This is why institutional investors tend to focus on both bond and equity investments.
Investing in bonds is similar to getting a loan from your bank. There is a set interest rate and maturity date on the loan, and the bank profits from the interest payments on outstanding loans.
With corporate bonds, the difference is that you would be considered the bank, giving a loan to a corporation. The business is still expected to pay interest, and there’s a maturity date. All this information, including the rate of return, is determined before the bond hits the markets.
Corporate bonds are a great source of steady income. They offer many other benefits as well, which are mentioned below.
There are a few things to consider with bond investing. First, all bonds are rated by a credit agency, and the higher the credit rating, the higher the probability of the interest being paid, and of receiving the money that was lent to the corporation.
Second, bonds are considered fixed income investments, and the payment would remain the same even if the credit rating changed before the bond matures.
Below is more information about the advantages of investing in the bond market, as well as a list of the potential best corporate bonds for 2017.
Advantages of Investing in Corporate Bonds for Your Investment Portfolio
Corporate bond investing falls into the fixed income investment category. This is because capital is allocated and a regular stream of income is received.
However, more important is that the capital which has been invested is considered safe, and should be returned after a certain period of time. These are what would be considered high-quality corporate bonds.
Since corporate bonds are considered a fixed income product, they often get compared to savings accounts, money market products, and certificates of deposit (CDs). These investments also offer safe capital.
However, the return on these investment products is based solely on the income return. The issue with this is that interest rates are near historic lows, and these investment products have a strong correlation to the benchmark interest rate. As a result, the return from such investments is rather low.
With corporate bonds, there is a possibility of seeing a higher return based both on a capital gains perspective and the earnings. Before getting into specifics, here are the benefits of owning corporate bonds.
1. Bondholders Get Paid First
A corporation’s financial structure is divided into two parts. One is debt, which would be bonds, lines of credit, and any other forms of borrowed money. The other is equity, which includes common and preferred shares of the company. Between debt and equity, debt is higher on the corporate structure.
Let’s say a company has common shares trading on the exchanges. The business happens to generate a lot of cash flow and rewards its shareholders with a dividend payment. It also issues bonds, which provide investors with an interest payment.
In this case, the company’s number-one obligation would be to pay the interest on the debt before paying the dividend on the common shares. Then, once the bondholders have been satisfied, the dividend can be paid. This applies to all companies that are listed on the trading exchanges.
2. Top of the Corporate Structure
Again, let’s say a company has bonds and common shares available for investors to purchase. One day, due to poor management decisions, the company must either restructure itself or file for bankruptcy.
Being a common shareholder of a company that is restructuring or filing for bankruptcy could result in the loss of your status as an investor in that business. After all, if the company does not exist tomorrow, it means that the shares are worth nothing.
But, for bondholders, it’s a different situation. If there happens to be money left over when a company restructures or files for bankruptcy, bondholders are the first to be paid. Common shareholders will be second in line.
3. Steady Income Returns
Investing in common shares of a company that pays a dividend means there’s always the possibility of seeing the payout being cut. Since the company decides on its own whether it will even make a payout, there is no set of rules regarding when and if a dividend must be paid and maintained.
With corporate bonds, it’s a different story, since bonds have a set maturity date, a coupon payment (interest payment), and a maturity value (also known as face value). Before the bonds are issued, these details are determined and set in stone once the product is available on the markets.
For instance, say a 10-year corporate bond was issued with a 2.28% annual interest payment and a face value of $1,000. If an investor purchased $1,000 of the corporate bond, then $22.80 (2.28% x $1,000) would be received as an interest payment. If the bond happens to trade lower or higher, the same $22.80 payment would be received regardless.
4. Predictable Returns
When planning to invest in common shares, it’s wise to research the company first and see if you can predict the future share price. However, an accurate prediction can be difficult, particularly due to the effect of current economic, political, and corporate events.
Corporate bonds pay out once the bond has matured. The face value of corporate bonds and the amount returned to investors is $1,000, regardless of the environment.
If the bond was purchased at the issue date, then $1,000 would be paid, and then received again at maturity. And if the bond was bought after the issue date, below the face value, then $1,000 would still be received and a capital gain would be calculated. In the case in which a bond was to be purchased after the issue date at a higher price than the face value, a capital loss would be incurred at maturity.
Other than the capital, there is also the income that will be generated. This would be a fixed payment.
When purchasing a bond at the issue date, the return is known, provided that the bond is held until maturity. But if the bond were to be purchased after the issue date, the investor is given a calculation of the annual return received, known as the yield to maturity (YTM). This factors in both the capital gain/loss and the income that would be received.
5. Outperformance in Economic Downturns
When there is an economic downturn, such as a recession, many investors tend to look at their investment portfolio much more frequently. The stock market is known to be very volatile in these periods and history shows that returns are generally negative.
Remember that bonds are not correlated to the stock market and actually outperform it. This is because equity investors are shifting their investments from common shares to owning bonds. There is also more demand for bonds due to their predictable returns and steady income.
6. Better Returns Than Other Fixed Income Products
As mentioned earlier, bonds are put in the same basket as saving accounts and CDs. With these investment products, the principal investments are safe and are returned once the maturity date comes around. There is no change in the value of the investment.
Note that a savings account is simply a product in which to park money. Whatever amount of money that is put in will remain the same, and interest will be earned on that capital.
Certificates of deposit are similar to a bond, with a maturity date and a promised interest rate. Every dollar invested will be returned, and there is no fluctuation in the investment price. The return will be based on the interest rate that is agreed to before the capital is allocated into the investment.
Bonds are similar to CDs, although the bond price could see a change during ownership. This is due to investors bidding and asking for different prices before the maturity date. If the bond were to be purchased at the issue date and held until maturity, the face value would be received. Therefore, at the end of the day, the fluctuations of the bond price won’t really matter.
Since bonds see a change in price, their risk is higher than savings accounts and CDs. As a result, investors expect a higher return on investment. This is why corporate bonds tend to offer higher returns.
List of Corporate Bonds
| Issuer Name | Maturity Date | Price | YTM | Security # | CUSIP # | Credit Rating |
|---|---|---|---|---|---|---|
| Bank of America | Apr. 19, 2026 | $1,011.50 | 3.35% | 0264577 | 06051GFX2 | A |
| Wells Fargo & Co | Apr. 22, 2026 | $984.60 | 3.19% | 0264625 | 949746RW3 | AA |
| eBay Inc | Jul. 15, 2022 | $1,005.60 | 2.48% | 0245353 | 278642AE3 | BBB+ |
| Morgan Stanley | Jan. 24, 2019 | $1,017.40 | 1.48% | 0237583 | 61746BDM5 | A+ |
| Rogers Communications Inc. | Nov. 15, 2026 | $971.20 | 3.25% | 0271217 | 775109BF7 | BBB+ |
| Husky Energy Inc | Apr. 15, 2024 | $1,039.20 | 3.36% | 0239320 | 448055AK9 | BBB |
| Enbridge Inc | Jun. 10, 2044 | $979.40 | 4.63% | 0242118 | 29250NAJ4 | BBB |
1. Bank of America Corp
Bank of America Corp (NYSE:BAC) is one the largest banks in the U.S., with a long history of operations. Its bond maturity date is in April 2026, and the interest payments are made on a semi-annual basis, in April and October.
If this bond were to be purchased, the price that would be paid is $1,011.50, representing the current coupon rate of 3.46%.
Since a premium is being paid for the bond and $1,000 would be received, there will be a capital loss. Therefore, the return would be 3.35% when factoring in both the income and capital loss.
Bank of America has an investment-grade credit rating of A, meaning there is a high probability that the interest income and principal will be paid at maturity.
2. Wells Fargo & Co
Wells Fargo & Co (NYSE:WFC) operates in the financial service sector. It offers its customers a variety of products, such as banking accounts, investments products, mortgages, credit cards, and much more.
This corporate bond is currently trading below face value. This means that if it were to be purchased and held until the bond matures, there would be a capital gain incurred. Given the expected income, the annual YTM is 3.19%, which is higher than the initial three percent coupon rate that is given to investors.
This bond pays interest on a semi-annual basis.
3. eBay Inc
eBay Inc (NASDAQ:EBAY) is a common stock that does not pay out a dividend. However, income investors wanting exposure to eBay could look at this corporate bond investment. This is the great thing about the bond market: there are income opportunities which are not offered in the equity market.
This bond is trading slightly higher than its face value of $1,005.60. If the bond were to be purchased at this price, the yield to maturity would be 2.48%.
The interest payments are made every year in January and July.
4. Morgan Stanley
The bond offered by Morgan Stanley (NYSE:MS) has a shorter maturity time than the other bonds mentioned in this article. There are fewer than two years left until the bond matures in January 2019. Interest is paid out in January and July of each year.
Also, since this bond has a shorter period until maturity, there will be less daily volatility.
5. Rogers Communications Inc.
Rogers Communications Inc. (NYSE:RCI) is a Canadian telecommunications company. It operates in an oligopoly environment, meaning it only has a few direct competitors.
Rogers has been paying a dividend for more than a decade, and has never missed a payment. As a potential bond investment, you can take this to mean that the interest will more than likely be paid.
This corporate bond will mature in November of 2026 and is currently trading at a discount, with a current price of $971.20. Purchasing this bond at a discount would result in a capital gain.
In addition, there will be income received, which will only add to the bottom line. Purchasing the bond at $971.20 would result in a total annual return of 3.25%. This is higher than at the time of the issue date, when it was 2.9%.
This bond offered by Rogers pays out interest in May and November of every year until maturity.
6. Husky Energy Inc
Another Canadian business, Husky Energy Inc (TSE:HSE) operates in the energy segment, and has made lists of the top corporate bonds for investors looking for oil exposure without the volatility. This is in comparison to owning the common stock.
Interest is paid out every April and October. For every $1,000 owned of this bond, a $20.00 interest payment would be received every six months.
This bond is currently selling above its face value, which has resulted in an annual return of 3.36%, were the bond to be held until maturity.
7. Enbridge Inc
Enbridge Inc (NYSE:ENB) is an energy transportation company that has assets across North America. Its main operations are in gas distribution, transporting oil and natural gas, green power, and energy services.
A high-yield corporate bond, the annual YTM would be 4.63%. There are two reasons for this.
First is that the bond is trading below its face value, with a current trading price of $979.40. The second is the long maturity of 2044.
Since it has a longer maturity date, there is greater risk compared to the rest of the bonds on this list, due to how much could occur until the bond matures. This is why the YTM is higher as well.
There are some things to keep in mind as well. For starters, Enbridge pays its common shareholders a dividend which has been experiencing growth. Also, the dividend has never been cut. Lastly, Enbridge’s earnings are protected from inflation and the company is known for its strong cash flow.
All this considered, there is a high probability of continued interest payments and, more importantly, getting the principal capital back.
Final Thoughts On Corporate Bonds
Even though there are many benefits to owning corporate bonds, I would still recommend having a diversified portfolio that includes both bonds and equity investments. I say this because both bonds and equity investments tend to move in different directions at times.
For instance, there will be times when bonds outperform equities and vice versa. So, there will be no missed opportunities if you have a diversified investment portfolio.
The general formula to determine how much exposure you should have to bonds and equities is 100 minus your age. That number is the percentage of the equity in your investment portfolio. For example, if you are 40 years old, the result toward equity investments would be 60% (100 – 40 = 60).
The remainder of the portfolio would be invested in bonds. As time passes, adjustments will be made to reflect the change in percentage.
Just a reminder: this formula is only used as a guideline. There are other factors in play, such as risk tolerance, holding periods, and taxes. Also, once you determine the allocation percentage, you must be comfortable with your decision, given the potential for poor portfolio returns and volatility.