These securities should sit preferably within a tax-shielded internet brokerage account.
You will recall that:
- Level 1 was getting to the sound foundation of no debt and paying off your mortgage
- Level 2 was setting up an 'Easy Access' bank accounts (both current/checking accounts and deposit/savings accounts)
- Level 3 was all about fixed-rate bank accounts or 'savings bonds' as they are called in the UK
- Level 4 dealt with Exchange Traded Funds
- Level 5 covered government bonds (or 'gilts' as they are known in the UK)
- Level 6 was assembling a portfolio of high-yield dividend shares
- Interest - known as a coupon - paid every year
- Repayment of the principal - the original nominal loan amount (i.e. not necessarily what was paid for it initially) - at the maturity date (although some bonds do not have a maturity date and are 'perpetual' (at least until the company/bank borrowing the money chooses to repay the principal)
Bonds can act as good portfolio diversifiers for investors because they tend to perform differently from shares - i.e. there is a low correlation between the two types of asset. For example, when stock markets fell between 2000 and 2002, central banks cut interest rates to stimulate economic growth. In turn, bond investors enjoyed rising capital values, offsetting the losses on their equity holdings.
In one sense, bonds are usually a safer source of income than dividend shares, because the initial outlay is (usually) repaid and the coupon or interest is fixed from the start.
- Many bonds are traded only in relatively large minimum bundles: e.g. 10,000 units (or even 50,000), meaning that you need quite a lot of money to make just one purchase (echoes of 'putting all your eggs in one basket') - the exception (in the UK) is perpetual bonds (which means, this might be a good place to start), although the minimum is still £1000
- When you buy, you will have to also pay for the accumulated (but not yet paid) coupon - so it could cost you a bit more than you expect
- go to Bondscape (as described in a previous post) and see the details for Euro Sterling bonds
- Investor's Chronicle also provides information on a selection of corporate bonds
- we're after good returns, so focus on the Income Yield and Gross Redemption Yield
- as mentioned before, perpetual bonds might be the easiest to start with, as the minimum purchase is relatively low - there are currently 5 on offer, all banks, with Income Yields of 7-8% and Gross Redemption Yields of 6-9%
- if you can afford it, look at tying in a good yield for a long period - e.g. Halifax 2021 9.375% with a Gross Redemption Yield of 7.8% (the high rate indicates that the market is a bit nervous about this one - but you need to make your own judgement about the future viability of Halifax)
- to simplify the calculations, aim to buy bonds at around 100 - then you are not paying too much for future interest rate expectation
- an article on commercial bonds from This is Money's Midas
- trading corporate bonds from This is Money
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.