Corporate Bonds

Archive for March, 2010

Question: Should I buy Dow Chemical 5.75% bond maturing in 2019?

I own 5 cd's that mature 1,2,3,4 and 5 years from now. The earliest one matured and I am thinking of replacing it with a corporate bond since it yields 5.75% vs 2.5% for a CD. Its BBB- which is the lowest rated investment grade. Any thoughts on this?

Answer: 5.75% is not particularly good for a 10 year BBB rated bond. Personally, I would rate it about BB. I am a little more particular than the rating agencies.

Here is an alternative that you might find somewhat more attractive on a couple of accounts. It is a closed end bond fund with the ticker HSF. Its current distribution is 7.5%. It pays monthly. Its average bond portfolio rating is BBB+. It does have some drawbacks though that the Dow bonds do not. It does not have a maturity date. The distribution is not uniform and could drop.

One advantage is that it is actively traded whereas the Dow bonds may not be. If you have to sell it there is ready market for it. There may not be for the Dow bonds. You would not believe the spread between bid and ask on bonds for retail investors. They are very steep.

Another selling point of HSF is that it sells at about a 7.5% discount to net assets instead of a premium which is what you will pay for the Dow bond.

You did not mention the amount you were thinking of investing. Do not put too much into any one investment.

Another alternative that you might find interesting would be KO. It currently pays only 2.9% but it does raise its dividend on an annual basis. In 10 years time if history is any indication the dividend will be about 6.5 to 7% based on current price. Another is MCD. Its dividend is a little greater and it also has a similar history of raising its dividend.

Davos Annual Meeting 2010 - Rethinking Values in the Post-Crisis World