We’ve heard a lot about what’s going to happen once the Federal Reserve stops its second bond-buying program (aka “QE2”) on June 30…
My colleague Dan Ferris is ready for stocks to drop. Another colleague, Jeff Clark, is looking to short bonds.
Myself? I expect bond yields will fall and stocks will stay about the same. I’ve looked at the evidence, and it’s clear to me. But there are plenty of arguments for the other side… And there are never any guarantees. So we have to prepare for a variety of outcomes.[ad#Google Adsense 336×280-IA]And I’ve found an investment that should make money whether stocks tank or rally higher once the Fed steps back from the market. Let me explain…
For many folks, bonds are boring… You give your cash to a company in exchange for its promise to pay you a steady stream of interest and return of your money at the end.
Most investors equate bonds with safety. The companies that issue bonds have a legal obligation to pay the interest – unlike stock dividends, which companies pay at their discretion. And if a company gets into financial trouble, the bondholder has a higher legal right to the company’s assets than shareholders have. Shareholders often get nothing out of bankruptcy proceedings… while bondholders split the assets.
The downside with traditional bonds is the payments are fixed. If the company prospers, you don’t share in that success… For that upside potential, you usually need to buy stocks.
That’s why I’m telling my Retirement Millionaire readers to buy “convertible bonds.”
The beauty of convertible bonds is they carry the upside potential of stocks without relinquishing the safety of a bond.
They pay interest like a regular bond… And just like traditional bonds, the payments are more secure and bondholders have priority in bankruptcy proceedings. But they give the investor the right to convert his bonds to common stock – which makes the bond’s value rise if the company’s share price increases.
If the bond market goes down, the value of the stock-conversion options stops your investment from dropping as much as a bond would. Similarly, if stocks go down, the bond portion protects you from losing as much as you would with the stock alone.
I first wrote about convertible bonds in May 2009. Back then, I recommended a mutual fund, the Nicholas Applegate Equity and Convertible Income Fund (NIE). I prefer buying convertibles though a mutual fund. It adds to our security, diversifying our risk across many different bonds.
My readers have made 66% on NIE so far. That’s an incredible return for such a safe investment. I can’t guarantee that kind of performance going forward, but I still think NIE is a great deal here…
NIE holds convertible bonds from companies like McDonald’s, Abbott Labs, and Gilead Sciences. And it pays an annualized distribution of about 6%.[ad#article-bottom]Plus, right now, the fund trades at a 9% discount to its net asset value (NAV). That means NIE is trading for less than the market value of the individual securities it holds. In other words, we can buy $1 of assets for $0.91.
If the shares move up to their actual value, you’ll make about 10%. If the stock market takes off, you’ll ride up with it, because the bonds are convertible to stocks. If the market goes lower, the bonds’ income will protect you more than holding stocks outright would. And if things stay the same, you’ll collect the 6% yield.
It’s a classic Retirement Millionaire investment mix of safety, income, and stock exposure. Right now, if you’re worried about which way the market’s going and you’re stuck earning next to no interest on your cash, this is the best “no matter what” investment out there.
Here’s to our health, wealth, and a great retirement,
— Doc Eifrig[ad#jack p.s.]
Source: Daily Wealth