Comments on: A Primer on Bonds – II (Investing in Bonds) http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm Building Wealth through Saving and Investing Sun, 12 Feb 2012 23:42:26 -0330 http://wordpress.org/?v=abc hourly 1 By: Clark http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-115079 Clark Thu, 02 Sep 2010 23:52:09 +0000 http://www.milliondollarjourney.com/?p=1377#comment-115079 @Cristian: I do not know about the tax rates for a corporate structure but I'll go with what you mentioned. Yes, in a non-registered account (inside a corporation or not), bonds are not the wise choice. I agree that a wholesale failure of well-researched, diversified individual stocks is unlikely. The drawback to such a strategy is if a market crash occurs in the last year or two before withdrawal from your long-term portfolio. While you can take solace from the minimized loss due to the dividends, how long can you postpone your withdrawal (selling) from that account until the recovery happens? Of course, if you have such a high value in that account that the dividends would still cover the needs, then it is another story. If it is just bonds vs. dividend stocks in a taxable account for the long-term, then dividends win. But, for an investor's overall portfolio, bonds or some other form of fixed income component in a tax-sheltered account would be essential to ride out the rough periods. @Cristian: I do not know about the tax rates for a corporate structure but I’ll go with what you mentioned. Yes, in a non-registered account (inside a corporation or not), bonds are not the wise choice. I agree that a wholesale failure of well-researched, diversified individual stocks is unlikely. The drawback to such a strategy is if a market crash occurs in the last year or two before withdrawal from your long-term portfolio. While you can take solace from the minimized loss due to the dividends, how long can you postpone your withdrawal (selling) from that account until the recovery happens? Of course, if you have such a high value in that account that the dividends would still cover the needs, then it is another story.

If it is just bonds vs. dividend stocks in a taxable account for the long-term, then dividends win. But, for an investor’s overall portfolio, bonds or some other form of fixed income component in a tax-sheltered account would be essential to ride out the rough periods.

]]> By: Cristian http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-115063 Cristian Thu, 02 Sep 2010 02:09:00 +0000 http://www.milliondollarjourney.com/?p=1377#comment-115063 Thank you for the replies, and sorry, it is my mistake that I didn't mention that I was talking about non-registered investments (and to make it even more complicated, non-registered investments inside a corporation). I understand diversification, but it seems to me that if the sum allocated to income investments is spread between a number of blue-chip dividend stocks after a serious analysis of the financials of each company the risk that Rupert was talking about is diluted. What is the chance that several such companies are going to fail all at once? On the other hand, nothing prevents me from switching to a different company once I see that the dividend of a certain company is reduced... Inside the corporation dividends are taxed at 33% and that goes down to zero once dividends are paid to the corporation shareholders (at least that is what understand) while income from bonds is taxed at maximum corporate rates (almost 50%). In other words, we are comparing a certain loss of 50% of my income with a hypotetical loss (if the company fails, if the dividends are reduced, and the list could probably continue). If the stock market goes down, my dividend stocks would go down too, but the dividends would still be coming in (as it happened with a lot of companies in the recent downturn) thus diminishing my losses by the amount of the dividend. And when we're talking long-term (15 years or more) with a good risk tollerance, to me dividend stocks seem somewhat of a no-brainer... Thank you for the replies, and sorry, it is my mistake that I didn’t mention that I was talking about non-registered investments (and to make it even more complicated, non-registered investments inside a corporation).
I understand diversification, but it seems to me that if the sum allocated to income investments is spread between a number of blue-chip dividend stocks after a serious analysis of the financials of each company the risk that Rupert was talking about is diluted. What is the chance that several such companies are going to fail all at once? On the other hand, nothing prevents me from switching to a different company once I see that the dividend of a certain company is reduced…
Inside the corporation dividends are taxed at 33% and that goes down to zero once dividends are paid to the corporation shareholders (at least that is what understand) while income from bonds is taxed at maximum corporate rates (almost 50%).
In other words, we are comparing a certain loss of 50% of my income with a hypotetical loss (if the company fails, if the dividends are reduced, and the list could probably continue).
If the stock market goes down, my dividend stocks would go down too, but the dividends would still be coming in (as it happened with a lot of companies in the recent downturn) thus diminishing my losses by the amount of the dividend.
And when we’re talking long-term (15 years or more) with a good risk tollerance, to me dividend stocks seem somewhat of a no-brainer…

]]> By: Clark http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-115060 Clark Wed, 01 Sep 2010 23:23:36 +0000 http://www.milliondollarjourney.com/?p=1377#comment-115060 @ Cristian: Rupert beat me to it but another factor is diversification. I see that you are talking about long-term goals; yes, one could have 100% stocks in their 20s and ride out a recession. As one ages, there is a need for stability due to dependents and commitments. Bonds offer the peace of mind through less volatility, albeit at lesser but stable returns than stocks. Bonds are tax-free in your TFSA and bonds in your RRSP are only going to be taxed at your marginal rate upon withdrawal (hopefully at retirement). Only when you hold bonds in your taxable account are you going to be taxed on 100% of the income. The link below may help with your asset allocation. http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm @ Cristian: Rupert beat me to it but another factor is diversification. I see that you are talking about long-term goals; yes, one could have 100% stocks in their 20s and ride out a recession. As one ages, there is a need for stability due to dependents and commitments. Bonds offer the peace of mind through less volatility, albeit at lesser but stable returns than stocks.

Bonds are tax-free in your TFSA and bonds in your RRSP are only going to be taxed at your marginal rate upon withdrawal (hopefully at retirement). Only when you hold bonds in your taxable account are you going to be taxed on 100% of the income. The link below may help with your asset allocation.

http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm

]]> By: Rupert Rode http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-115049 Rupert Rode Wed, 01 Sep 2010 17:30:03 +0000 http://www.milliondollarjourney.com/?p=1377#comment-115049 Bonds are more secure than dividends. Dividends can be reduced at any time, while bond interest is fixed. If the company runs into financial trouble, the bondholders are secured investors, and get paid out before any shareholders. In addition, the bond interest rates for a company are usually higher than any dividend rate for the same company. Dividends are paid out of after-tax earnings of the company, while bond interest is paid out before taxes. Bonds are more secure than dividends. Dividends can be reduced at any time, while bond interest is fixed. If the company runs into financial trouble, the bondholders are secured investors, and get paid out before any shareholders.

In addition, the bond interest rates for a company are usually higher than any dividend rate for the same company. Dividends are paid out of after-tax earnings of the company, while bond interest is paid out before taxes.

]]> By: Cristian http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-115048 Cristian Wed, 01 Sep 2010 15:30:35 +0000 http://www.milliondollarjourney.com/?p=1377#comment-115048 Hello everybody, I have a question for anyone who cares to answer... I may be missing something, but there are several income instruments that I know. There are bonds of course, but then there are preferred shares and there are also dividend stocks. (There are also savings deposits and GICs but they are not worth mentioning since they don't even keep up with inflation). Why would one choose to buy bonds and have the income taxed at maximum rates, when investing in preferred shares or dividend stocks would bring a similar (if not, often, bigger) income with significantly smaller taxes? Especially for someone who is investing long-term goals and is willing to stick to the dividend-paying stocks through thick and thin (and provided that they are carefully selected based on fundamentals), what matters at the end of the day/month/year is money left in the pocked after taxes. Am I missing something?... Thanks for any input, Cristian Hello everybody,
I have a question for anyone who cares to answer…
I may be missing something, but there are several income instruments that I know. There are bonds of course, but then there are preferred shares and there are also dividend stocks. (There are also savings deposits and GICs but they are not worth mentioning since they don’t even keep up with inflation).
Why would one choose to buy bonds and have the income taxed at maximum rates, when investing in preferred shares or dividend stocks would bring a similar (if not, often, bigger) income with significantly smaller taxes?
Especially for someone who is investing long-term goals and is willing to stick to the dividend-paying stocks through thick and thin (and provided that they are carefully selected based on fundamentals), what matters at the end of the day/month/year is money left in the pocked after taxes.
Am I missing something?…

Thanks for any input,
Cristian

]]> By: JFG http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114402 JFG Mon, 26 Jul 2010 21:00:06 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114402 I'm just glad you generated a little buzz on the bonds. No, they are not sexy and wild, but a portfolio with no income, is well (for me, anyways) not a portfolio. I’m just glad you generated a little buzz on the bonds. No, they are not sexy and wild, but a portfolio with no income, is well (for me, anyways) not a portfolio.

]]> By: Clark http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114401 Clark Mon, 26 Jul 2010 20:55:25 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114401 @Colin: Good questions! If a company goes bankrupt, then the bondholders are second in line to be paid. Secured creditors with collateral get first preference, followed by bondholders while stockholders bring up the rear (assuming enough money is available for all!). If it is a Chapter 7 (bankruptcy) filing, then bondholders should receive a portion of their investment. If it is a Chapter 11 filing, then the bonds may trade, but the investor will not receive any interest or principal. In other words, the company defaults, causing the bond value to drop! Unless you have insider information about the company, I don't know if you would be able to find a buyer to cut your losses. Of course, there may be some very knowledgeable investors who know something that you don't and offer to buy even after the bad news gets out! @Colin: Good questions! If a company goes bankrupt, then the bondholders are second in line to be paid. Secured creditors with collateral get first preference, followed by bondholders while stockholders bring up the rear (assuming enough money is available for all!). If it is a Chapter 7 (bankruptcy) filing, then bondholders should receive a portion of their investment. If it is a Chapter 11 filing, then the bonds may trade, but the investor will not receive any interest or principal. In other words, the company defaults, causing the bond value to drop! Unless you have insider information about the company, I don’t know if you would be able to find a buyer to cut your losses. Of course, there may be some very knowledgeable investors who know something that you don’t and offer to buy even after the bad news gets out!

]]> By: Bucky http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114399 Bucky Mon, 26 Jul 2010 19:06:24 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114399 In a takeover the bondholders of the company being taken over usually have the acquiring company assume the debt obligations but not always. You have to read the proposal. A bankruptcy is different.The bondholders rank ahead of the equity holders but behind the secured credit holders like the gov't. Most often the bondholders will receive something but seldom full value for the bond. I either case there is no market for the bonds In a takeover the bondholders of the company being taken over usually have the acquiring company assume the debt obligations but not always. You have to read the proposal.
A bankruptcy is different.The bondholders rank ahead of the equity holders but behind the secured credit holders like the gov’t. Most often the bondholders will receive something but seldom full value for the bond.
I either case there is no market for the bonds

]]> By: Bucky http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114398 Bucky Mon, 26 Jul 2010 18:58:59 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114398 What hasn't been mentioned is what happens to bonds in an inflation or deflation scenario. Inflation has been benign recently but I was an investor in the 70's when bond prices were dropping like a stone. I think in deciding a bond allocation one has to consider future inflation/deflation prospects. Also not discussed is default. Governments as well as corporations can and do default. Do you trust the rating agencies after the results of the past two years? What gov't. bonds are in your ETF? Any Greek or BP or CDO? Thanks but I will stay with Cdn dividend stocks and keep my tax breaks What hasn’t been mentioned is what happens to bonds in an inflation or deflation scenario. Inflation has been benign recently but I was an investor in the 70’s when bond prices were dropping like a stone. I think in deciding a bond allocation one has to consider future inflation/deflation prospects.
Also not discussed is default. Governments as well as corporations can and do default. Do you trust the rating agencies after the results of the past two years?
What gov’t. bonds are in your ETF? Any Greek or BP or CDO?
Thanks but I will stay with Cdn dividend stocks and keep my tax breaks

]]> By: BadCaleb http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114397 BadCaleb Mon, 26 Jul 2010 17:38:31 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114397 I hold XSB or CLF for short term holdings and so far have only PHN High Yield Bond fund in my RRSP. For my 401k, I use Pimco Total Return and Vanguard Total bond fund. However, I am slowly moving my Pimco to Vanguard for it's excellent 0.07% MER. I would like to learn more about bonds and how to purchase them. I like the idea of building a bond ladder and will look into doing this for my Canadian bond portion of my investments whenever it grows large enough. I hold XSB or CLF for short term holdings and so far have only PHN High Yield Bond fund in my RRSP. For my 401k, I use Pimco Total Return and Vanguard Total bond fund. However, I am slowly moving my Pimco to Vanguard for it’s excellent 0.07% MER. I would like to learn more about bonds and how to purchase them. I like the idea of building a bond ladder and will look into doing this for my Canadian bond portion of my investments whenever it grows large enough.

]]> By: Clark http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114396 Clark Mon, 26 Jul 2010 16:21:25 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114396 Thanks for the comments. I'm looking to put away some cash for a short-term goal (3-5 yrs) and thinking if bonds would be the way to go. Yes, there is the chance of principal loss but there is also an upside when compared to GICs and savings accounts. I have only looked at iShares' bond ETFs but maybe, I should look at Claymore too since FrugalTrader is partial to them! :) Thanks for the comments.

I’m looking to put away some cash for a short-term goal (3-5 yrs) and thinking if bonds would be the way to go. Yes, there is the chance of principal loss but there is also an upside when compared to GICs and savings accounts. I have only looked at iShares’ bond ETFs but maybe, I should look at Claymore too since FrugalTrader is partial to them! :)

]]> By: colin http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114395 colin Mon, 26 Jul 2010 16:03:27 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114395 what happens to the bonds a person holds if the company is taken over? or what happens if the company suddenly comes out with news that they are having problems and may go bankrupt...similar to enron or worldcom where the books were cooked. I assume the bond prices would drop. could a person get out and cut their losses? (would there be a buyer on the other end)? these are some of the questions I have with bonds, just starting to learn more about them what happens to the bonds a person holds if the company is taken over? or what happens if the company suddenly comes out with news that they are having problems and may go bankrupt…similar to enron or worldcom where the books were cooked. I assume the bond prices would drop. could a person get out and cut their losses? (would there be a buyer on the other end)?
these are some of the questions I have with bonds, just starting to learn more about them

]]> By: FrugalTrader http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114394 FrugalTrader Mon, 26 Jul 2010 15:19:24 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114394 My fav short term bonds are claymore laddered bonds, CLF (govt) and CBO (corporate). What I like about CLF is the extremely low MER. My fav short term bonds are claymore laddered bonds, CLF (govt) and CBO (corporate). What I like about CLF is the extremely low MER.

]]> By: Financial Cents http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114391 Financial Cents Mon, 26 Jul 2010 14:56:34 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114391 Good post! I like some XSB in my RRSP. Not because it rhymes but because I like a portion of my RRSP holdings to survive interest rate hikes. I also like some XBB. Other these holdings in my registered accounts, I don't own bonds. I keep cash. I figure if the market really crashes (I mean down 5,000+ points) everything including bonds is going down with it, so bonds aren't much help anyhow. Good post!

I like some XSB in my RRSP. Not because it rhymes but because I like a portion of my RRSP holdings to survive interest rate hikes. I also like some XBB. Other these holdings in my registered accounts, I don’t own bonds. I keep cash. I figure if the market really crashes (I mean down 5,000+ points) everything including bonds is going down with it, so bonds aren’t much help anyhow.

]]> By: saveddijon http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114389 saveddijon Mon, 26 Jul 2010 14:38:32 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114389 Can we have more information on buying bonds directly? Right now buying a bond fund is risky given that interest rates are rock bottom and can only go up. But I might want to lock in at say 3% or so and buying a bond and holding until maturity doesn't have the same risk, unless you need to get out early. Can we have more information on buying bonds directly?

Right now buying a bond fund is risky given that interest rates are rock bottom and can only go up. But I might want to lock in at say 3% or so and buying a bond and holding until maturity doesn’t have the same risk, unless you need to get out early.

]]> By: Vern http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114388 Vern Mon, 26 Jul 2010 14:30:42 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114388 @ Canadian Capitalist: Thanks for the reminder that the TD -e-series Canadian Bond Index is not really a short term vehicle. I also have cash savings to make up for any potential principle losses. I'm mainly using the risk factor of the e-series funds to test my metal when it comes to investing. I figure if I can't take the risk of a bond index then I won't sleep later on if I move into ETFs. @ Canadian Capitalist:
Thanks for the reminder that the TD -e-series Canadian Bond Index is not really a short term vehicle. I also have cash savings to make up for any potential principle losses. I’m mainly using the risk factor of the e-series funds to test my metal when it comes to investing. I figure if I can’t take the risk of a bond index then I won’t sleep later on if I move into ETFs.

]]> By: Canadian Capitalist http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114387 Canadian Capitalist Mon, 26 Jul 2010 14:16:49 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114387 Thanks for the mention. I personally use short-term bonds in our portfolios because I agree with the contention that longer term bonds have not provided sufficient extra returns for the risk you are taking. @Vern: The TD e-Series Canadian Bond Index is *not* a short-term and is not ideal for short-term savings. It is equivalent to purchasing a medium-term bond since it tracks the universe of Canadian bonds. Thanks for the mention. I personally use short-term bonds in our portfolios because I agree with the contention that longer term bonds have not provided sufficient extra returns for the risk you are taking.

@Vern: The TD e-Series Canadian Bond Index is *not* a short-term and is not ideal for short-term savings. It is equivalent to purchasing a medium-term bond since it tracks the universe of Canadian bonds.

]]> By: Vern http://www.milliondollarjourney.com/a-primer-on-bonds-%e2%80%93-ii-investing-in-bonds.htm/comment-page-1#comment-114382 Vern Mon, 26 Jul 2010 12:25:19 +0000 http://www.milliondollarjourney.com/?p=1377#comment-114382 My short term savings for a house are in TD Canadian Bond Index - e-series. My short term savings for a house are in TD Canadian Bond Index – e-series.

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