Last month, I suggested that now is the perfect time to buy bonds. This weekend, Barron’s agreed, running a headline that said, “Time to Buy Bonds.”
While I continue to hold dividend stocks for the long term, lately I’ve been putting most of my cash to work in fixed income.
Treasurys are yielding more than they have since 2007. Investment-grade corporate bonds – those with very safe S&P Global ratings of BBB- or higher – have an average yield of 6.3%, their highest yield in nearly 15 years.
Meanwhile, non-investment-grade bonds, or junk bonds, are yielding an average of 9%. While these are more speculative than investment-grade bonds, they are still more conservative than stocks – even blue chip stocks.
There’s a very key difference between stocks and bonds.
A stock is worth only what someone is willing to pay for it at a given time.
A bond is worth $1,000 at maturity regardless of what anyone is willing to pay for it at any time.
Here’s what I mean.
When you buy a stock, the only way to make money on it is to sell it for more than you paid. When you want to sell the stock, you have to hope the price is higher than it was when you bought it.
With a bond, you know what the exact price of the bond will be on a certain future date. On the bond’s maturity date, you will receive $1,000 unless the company has gone bankrupt. Barring that unlikely scenario, you will get $1,000, regardless of whether you paid $1,000, $900 or $500 for the bond. You’ll also collect interest along the way.
It’s important to realize that even if the price of the bond falls while you own it, that won’t affect your eventual payout. At maturity, you will be paid $1,000.
So let’s say you buy a bond with a 5% coupon that matures on November 1, 2026. Right after you buy the bond, the company posts bad news and the bond drops to $950. A year later, there’s more bad news, and the bond market starts getting scared. Your bond drops all the way to $700, which is a big move in the bond market.
As we approach November 1, 2026, the bond’s price starts moving closer to the $1,000 mark. On that date, the bond matures and you are paid $1,000. It doesn’t matter that the market lost confidence in the bond two years earlier and the bond was trading at a huge discount. The bond will pay $1,000 at maturity no matter what.
The stock market has been a mess for two years. The S&P 500 is up this year, but that’s mostly due to seven Big Tech stocks. Most stocks in the market are down… and many are down big.
And this bear market shows no signs of slowing down in the near future.
When you can earn more than 5% risk-free in the short term in Treasurys, more than 6% in safe corporate bonds or even 9% in more speculative bonds and get your money back, you have to ask yourself whether it’s worth it to risk your cash in stocks, which historically average a return of 8% to 10% per year but involve much more volatility.
My long-term money is still invested in stocks because I (hopefully) have plenty of time for those stocks to grow. But my funds that I’ll need in the shorter term are in bonds right now.
I have a bunch of bonds maturing between now and the end of the year, and I’m excited about the safe income-producing opportunities we have now that weren’t available just a year ago.
You rarely hear someone pounding the table on bonds.
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Source: Wealthy Retirement