Best bond investments for the income investor

The Money Reporter regularly publishes tables of recommended government bonds, corporate bonds and preferred shares suitable for income-oriented investors. The monthly Fact and Advice Sheet also gives guidance for current bond investing and alternative investments such as preferred shares.

What to do about bonds this month

Canadian bonds in general have returned 4.15 per cent since the beginning of the year, according to the FTSE Universe Bond Index. Government issues have been the best bond investments, having returned 4.40 per cent, outperforming corporates by a wide margin, with the latter returning 3.55 per cent over the same period.

Global bond yields are very low right now. They may start to rise this year once the Federal Reserve begins to tighten the U.S. money supply. Plus, other major central banks are not expected to announce significant expansions to the stimulus programs they have already announced — at least for now. Mind you, rate increases should be gradual given the lack of inflationary pressures. Still, with rates so low, the impact on bond investing should be considerable.

We recommend a fixed-income allocation of 40 per cent for persons of average risk tolerance, with a 45/55 split between government and corporate issues. We advise you to construct a laddered-bond portfolio with short-term and medium-term issues to reduce interest-rate risk.

What to do about preferred shares this month

Keep in mind that when we recommend that 55 per cent of your fixed-income portfolio consist of corporate issues, that doesn’t all have to be made up of corporate bonds. You can substitute as alternative investments some preferred shares in a proportion that is consistent with your risk tolerance. For investors with an average risk tolerance, we recommend no more than five per cent of your total investment portfolio.

Adding preferred shares to your portfolio can increase your return. Right now our selection of corporate bonds has an average yield to maturity of just 1.04 per cent, and the interest income on these issues is fully taxable. By contrast, our straight preferred shares have an average current yield of 4.85 per cent, and you’ll retain a higher proportion of that yield, thanks to the dividend tax credit. So if your tax situation allows for it, it’s worth considering straight preferred shares to populate a reasonable proportion of the corporate side of your fixed-income allocation. We also recommend our straight preferreds right now over our floating rate issues.


Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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