Wild times in the markets are creating opportunities in bonds for yield-starved investors.
You probably know all about how yields on dividend stocks have been rising with the recent market pullback. Less understood is the fact that there's now a decent selection of bonds issued by companies with middling credit ratings that yield in excess of 3 per cent.
Some examples: Home Trust Co.'s 3.4 per cent bonds maturing Dec. 10, 2018, had a yield of 3.3 per cent at the end of September. Cominar REIT 3.6 per cent bonds coming due June 21, 2019, had a yield of 3.5 per cent. Ford Credit Canada 2.9 per cent bonds maturing Sept. 16, 2020, had a yield of 3 per cent. To put these numbers in context, five-year Government of Canada bonds were yielding about 0.8 per cent, five-year bank GICs were yielding about 1.5 per cent in late September and alternative banks were offering 2.5 per cent at best.
There's more risk in corporate bonds than GICs backed by Canada Deposit Insurance Corp. We're talking here about the risk of a default on interest or capital repayment at maturity, and of price volatility ahead of maturity. You can see this risk level reflected in the fact that the aforementioned bonds, and others like them, are rated BBB (high) and BBB (low). That puts them on the lower rung of what qualifies as an investment grade bond, which means suitable for use by pension funds.
Ways to minimize risk with bonds such as these include keeping your term as short as possible and familiarizing yourself with the challenges faced by the companies that issued them. Diversification is also important – consider adding several different names to a portfolio that also contains GICs or government and blue chip corporate bonds.
Most online brokers now sell bonds online, so it's easy to shop the market. If you don't see anything of interest, call your broker's bond desk to see what else is on offer. Some brokers display only a portion of the bonds they have available.