As Dividends Dry Up, High-Yield Bonds Could Be Worth The Risk

As Dividends Dry Up, High-Yield Bonds Could Be Worth The Risk

almost 4 years ago2 mins

Investors already facing bracing blows to their portfolios have been dealt more damage in recent days as companies slash dividends and share buybacks. Luckily, one of the world’s biggest investment managers is advocating an alternative way to generate returns… 🤫

What does this mean?

Firms are responding to the prospect of an uncertain few months by conserving cash, leading to over $10 billion of dividends being suspended in the US alone. Others, including energy giant Shell – likely to suffer from falling oil prices – are instead opting to shelve expensive share buyback programs, leaving the likes of buyback-boosting SoftBank in the minority. (Check out our Pack on Investing In Oil & Gas for more on the future of energy.)

Shell was among the frugal firms seeing big share price gains on Monday
Shell was among the frugal firms seeing big share price gains on Monday

With companies frantically junking payouts, those focused on generating an income from their investments rather than simply hoping for their on-paper value to grow might be forgiven for looking forlorn. But leading brokerage firm Charles Schwab – currently in the process of taking over rival TD Ameritrade – has an idea 💡

The prices of high-yield company bonds – also known as “junk” bonds, due to their heightened riskiness compared to “investment grade” peers – have fallen sharply in recent weeks as investors think the prospect of their repayment has gotten even riskier. But Schwab believes prices have fallen so far that junk bonds’ conversely higher yields now make them worth adding to your portfolio.

Why should I care?

One investor’s trash is another’s treasure – and with the gap between government bond yields and high-yield corporate ones widening, Schwab could be onto something.

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Nevertheless, prices could yet fall further – and with companies strapped for cash, risk is high for a reason. That’s why normal investors (and even a few professional ones) aren’t allowed to own high-yield bonds directly.

There are, however, plenty of exchange-traded funds out there offering easy access – as well as a Finimize Pack on Corporate Bonds setting out the pluses and pitfalls of this approach 😉



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