When an investment you have held for years delivers a significant payout, your first instinct may be to find another opportunity that looks just like it. After all, why change a strategy that has worked? However, receiving a payout presents an opportunity to reassess your investment goals and explore alternatives that may offer similar benefits in different ways.
For many investors, the appeal of owning shares in established companies extends beyond the possibility of rising stock prices. Regular dividends provide an additional source of income, while the reputation and financial strength of the company can inspire confidence. These are valuable qualities, but investors may be surprised to learn that they are not exclusive to the stock market.
Looking Beyond Familiar Investments
Global investment-grade corporate bonds offer another way to invest in established companies while earning regular income. Unlike shareholders, who own a portion of a company, bondholders lend money to the issuer in exchange for contractual interest payments and the repayment of principal at maturity, provided the issuer meets its obligations.
Many international corporations and financial institutions issue investment-grade bonds. These securities are generally considered to carry lower credit risk than speculative-grade bonds because their issuers have demonstrated relatively strong creditworthiness.
For investors accustomed to receiving quarterly dividends, bonds may be particularly attractive. Depending on their terms, bonds can provide quarterly, semi-annual or annual interest payments. Unlike dividends, which companies may reduce or suspend, fixed-rate bond coupons are contractually determined, although payments remain subject to the issuer’s ability to meet its obligations.
More Than Just Interest Income
One feature of bonds that is most often overlooked is their potential for capital appreciation.
While stocks are widely recognized for their ability to increase in value, bonds can also be bought and sold at prices above or below their face value. Changes in interest rates, market conditions and an issuer’s creditworthiness can all influence bond prices.
Consider an investor who purchases a bond with a face value of US$10,000 for US$9,500. If the bond carries a 6% annual coupon, the investor receives US$600 in annual interest. Should its market value subsequently rise to US$9,900 based on an increase the market price, the investor would also have an unrealized capital gain of US$400. That gain could be realized through a sale, subject to transaction costs.
Of course, the reverse is also possible. Bond prices may decline when interest rates rise or an issuer’s financial position deteriorates. Investors must therefore consider credit quality, maturity, liquidity and market risk before making an investment decision.
Making Your Next Investment Count
A substantial payout should prompt more than a decision about where to place the proceeds. It is an opportunity to consider whether your portfolio still reflects your income needs, investment horizon and appetite for risk.
For investors who value regular income, reputable issuers and the possibility of capital appreciation, global investment-grade bonds deserve consideration alongside traditional equities.
Ultimately, your next investment does not have to resemble your last to help you achieve the same financial goals.
Shanique Williamson is Manager, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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