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Buy an IOU? Bond Investing Guide + Our Top Low-Vol Alternative

If you’m looking for income, I’m your guy.

I do not shy away from disagreeing on a good (or bad) stock that pays dividends.

But what about bonds? They look better than they have in recent years, with the Federal Reserve trying to stop inflation before it gets out of hand.

Well, I’m not ashamed of that front either.

of today Investment with Charles Tells you everything you need to know – benefits, risks and alternatives – about bonds.

Check out more in my conversation with research analyst Matt Clark.

Watch our entire conversation above or keep reading for highlights.

What is Bond?

slows down: We just did this topic independently, and I just want to start with the basics. First, what is a guarantee?

Charles: A bond is basically an IOU.

It is a debt instrument issued by a government, a company or perhaps a municipality. A certain entity issues an IOU, and it pays interest on it, semi-annually in most cases.

Suppose you pay $ 1,000 for a bond and you receive interest payments twice a year. At the end of the life of this relationship, you get its face value back. If it’s $ 1,000 you get it back. It’s $ 10,000, you get $ 10,000 back. No matter what this face value is, you get it back at the end of the relationship life.

The bonds can range from a few days to maturity up to even 30 years, or in some cases even longer. There are rare cases of 100-year bonds.

slows down: really?

Charles: It’s passionate about my health that I’ve been expecting to earn for 100 years, but they exist.

Why Buy Bonds?

slows down: Another question worth leading to is: What is the point? Why buy bonds?

Charles: What’s the point? There are two reasons.

The first is that income is expected. If you want income, bonds are the most traditional income instrument. So this is simple income.

Beyond that, bonds have another advantage in that they are minimally adjusted for stocks.

The year is kind of an exception, but most of the time, stock prices and bond prices are moving in different directions.

If your stock portfolio hits a few quick bumps, your bonds are doing well.

They offer diversity. They reduce the overall volatility of your portfolio.

There are risks

slows down: But there are risks. What are these?

Charles: I want to start with this warning. The US government is not going to default. If the US government repays by default, then we have bigger problems from our bond portfolio, right?

But with anything other than U.S. government bonds, there is always a risk of default. There is a risk that the borrower simply will not pay.

If you are buying high quality bonds, the risk is quite minimal. Unless you are buying junk bonds, this is not something you should worry about too much.

Now, the concern that you are to do There is … we all have this concern, especially for longer term bonds …

inflation.

The interest payments you receive every six months do not change. They are the same today as they are going to be in 30 years from today. They do not keep pace with inflation.

Beyond that, you will one day get the face value of the bond back. Suppose you buy the bond at the face value … you buy it for $ 1,000 today, and you get the $ 1,000 back within 30 years.

Well, in 30 years, those 1000 dollars will not go that far.

So this is your biggest risk. This one word: inflation.

Bond-like alternatives

slows down: Now, without going into too much detail, because next week we will be talking about stocks versus income bonds, what are some better alternatives to bonds that you can use for this semi-annual income stream?

Charles: There is no perfect replacement that offers the same combination of income and portfolio stability. It’s hard to emulate. But really a better alternative for most investors most of the time is going to be a dividend-paying stock.

If you buy a good and safe dividend payer with a long history of payments, then you will have a better chance of keeping up with inflation as most healthcare companies raise their dividends over time.

So this income stream increases every year or every two years. You do not get it with the guarantee.

Moreover, stocks have no finite value.

You can sell a stock next year, or you can sell it in 30 years at a higher price. Or at least that’s the hope!

Assuming we are not in the middle of a bear market, it is worthwhile to make money over time as the company grows.

You do not get it in bonds.

What type of dividend stock is most similar to bonds?

Focus on paying dividends that are also low volatility through our stock rating system.

If you focus on companies that have a high volatility rating in our system, that means yes Less volatileYou can recreate a lot of the volatility reduction you get with bonds.

It’s not a perfect replacement, but given all that, I think it’s better for most investors looking at bonds.

slows down: I see. Next week, we’re going to dive a little more into stocks versus bonds as income investments. If you have any questions about stocks, income or anything else, email us Feedback@MoneyandMarkets.com.

Where to find us

In the coming week, Matt will have more information on his latest episode of The Power Stock podcastSo stay tuned.

Do not forget to check out ours Ask Adam anything A series of videos in which chief investment strategist Adam Odell answers your questions.

You can also catch Matt every week on his Marijuana Market Update. If you are in the business of investing in cannabis, you do not want to miss its weekly insights.

Remember, you can email my team and me at Feedback@MoneyandMarkets.com – or leave a comment on YouTube. We love hearing from you! We may even present your question or comment in a future release of Investment with Charles.

To ensure profits,

Charles Saysmore_Sig

Charles Seismore, co-editor, Green Zone Fortunes

Charles Sizemore Is the co – editor of Green Zone Fortunes And specializes in income and retirement issues. He is also a frequent guest on CNBC, Bloomberg and Fox Business.

Buy an IOU? Bond Investing Guide + Our Top Low-Vol Alternative Source link Buy an IOU? Bond Investing Guide + Our Top Low-Vol Alternative

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