Bonds are usually the first thing that comes to people's minds when they think of income investments.
That's because bonds generally produce the highest current yield. They give you the most return tomorrow for the money you pay today.
That doesn't means they're the best way to invest for income. I prefer to think long-term, and bonds are not the best long term income investing strategy.
Also, bonds seems to be simpler than stocks that pay dividends. In some ways, that's a misconception. It is true that bonds of the same type, interest rates, duration, and so on behave very similarly. Bond interest is the income investment that makes you vulnerable to inflation.
Stocks are More Interesting Than Bonds
Bonds are much more mathematical than stocks. There are many more factors affecting them than most people realize, and you can analyze them in many ways, but the hundreds of bonds that have the same characteristics behave much the same. They appeal more to your inner accountant than do stocks.
Stocks are much more identified with the underlying corporation, so they share the company's story. If it's a new company with a product that is going to revolutionize the world, the stock shares that glamor. Bonds are . . . boring.
Buying Bonds is Not as Easy as Buying Stocks
The bond market is NOT easy as the stock market is. You can't just go online and order some specific bond issues. Actually you can, but it can be expensive.
Plus, it is set up for institutional investors -- that is, people who represent big bucks. Not the kind of money you and I have to invest.
You might get a broker to help you, if you have $50,000 or more to spend. But they'll charge you a very high bid/ask spread. Also, they'll want to sell you bonds that they have in their own inventory -- which means they want to get rid of them.
They might even tell you they're giving you a great deal by not charging you a commission. But that means they're making more money by selling you a bond they bought cheaply.
Online Bond Buying Services
However, there are a few services that allow you to buy newly issued bonds from reputable companies direct. They sent out emails every Monday letting you know what's available.
directnotes.com/
internotes.com/
eu.internotes.com/ -- for European bonds
You Buy Government Bonds Directly From the Treasury Department
Just go to treasurydirect.gov. You can buy T-bills, savings bonds, Treasury notes, Treasury Inflation Protected Securities (TIPS bonds), Treasury notes, Gulf Coast Recovery bonds and Treasury bonds.
For bonds from agencies back by, but not quite the government such as Ginnie Mae (GNMA) bonds, see your broker.
You could also buy bond mutual funds, but then you run into a whole host of issues regarding expenses and having to pay taxes on capital gains because the manager actively buys and sells.
Avoid Bond Mutual Funds, Especially Ones With High Expenses
If you do go with a bond mutual fund, choose the applicable fund with the lowest expenses. And don't ever pay a load. They're outrageous, especially for bond funds. It's easiest to start with Vanguard. They're often the fund offering the lowest rate because they're the only mutual fund family that focuses on keeping expense ratios low.
The same is true of Exchange Traded Funds -- look for low costs. Those are the best way to buy corporate and municipal bonds.
If you do sell a bond prior to maturity, you could lose money. It depends on where interest rates are. Right now they're so low that it's difficult to see how they can be much lower in the future. And you can't predict the future of interest rates anyway. It's better not to try. That's why I believe it's best to simply buy a bond and hold it until maturity -- of course collecting your interest checks until then.
Bonds are an important type of income investments, but especially for people who are already retired and need to maximize their current cash. Just as with other investing techniques, younger people still accumulating their retirement portfolios should concentrate on buying stocks that pay dividends that will growth in the future.
Author Resource:
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