Bond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bon...
Need a Little Extra Income?
11/26/2007 12:00 am EST
Gordon Pape, editor of The Income Investor, thinks a steady payer with a conservative bent is sometimes just what investors need.
My top pick for November is CANADA 4% BONDS DUE JUNE 1/16. These are government mid-term bonds with a current price of $100.76 (per BMO Nesbitt Burns). Their yield to maturity is 3.93%. The bonds have a credit Rating of AAA (DBRS and Moody's) and a risk rating of very conservative.
These bonds are issued by the federal government to fund its various operations and commitments. The bonds have a coupon rate of 4% and mature on June 1, 2016. From a credit perspective, you won't find a higher-quality security. The bonds provide safety and reliability and are therefore particularly attractive during this current market turmoil and uncertainty.
With an eight-year term, they assure an acceptable yield through and beyond the volatile returns likely in the money market. At the same time, they are partially protected from the large price swings that occur in the long bond market. Moreover, as medium-term Canadas, they are always highly liquid and reliable quotes are available daily.
It is possible, although unlikely, that inflation could soar over the next few years thereby eroding the purchasing power of the interest payments as well as the principal repayment in 2016. In addition, rapidly rising rates could drive the bonds below your cost price, creating an unrealized loss and even locking you in until maturity.
Interest is paid at the coupon rate of 4% on June 1 and Dec. 1 of each year. The principal amount will be repaid in full on June 1, 2016. The interest payments are fully taxed in the year of receipt if the bonds are held in a non-registered account. The Canada Revenue Agency treats your premium of 76c on the purchase price as a capital loss in 2016 if you hold the bonds to maturity.
These high-quality bonds are suitable for conservative investors seeking safe, regular income who are able to hold the investment to maturity. However, there is an efficient, active market in these bonds so there should be no problem selling them if it becomes necessary to liquidate the position prematurely.
These bonds are available through any broker or dealer in units of $1,000 although you may be able to purchase smaller amounts. When you buy, you will also pay accrued interest to the date of purchase. If you are seeking safe, regular income, these bonds are an excellent addition to your portfolio and should be considered as a cornerstone security.
Buy. If you can, shop the market for the best price.
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