Corporate bonds can often outperform stocks but have less risk. Corporate bond issuers have obligations to pay interest and return an investor's principal at maturity, a much more stringent requirement than stock issuers, which can suspend dividends at any time and have no obligations to repay stock investments. These bond issuer obligations help bonds retain their value even during challenging times. Corporate bonds can fit many risk/reward profiles and are a much-needed complement to stocks in investor portfolios.
|Greater certainty of recurring income|
|Greater protection of principal|
|More investment choice than the stock market|
Individual Corporate Bonds vs. Stocks
A key advantage individual corporate bonds have over stocks is that they can achieve strong returns and limit your downside. Most corporate bonds trade in a range between 80 and 125. While some bonds do fall below 80, it is rare.
Being able to quantify your downside is an important tool for individual bond investors. A key reason bonds have less downside than stocks is that a bond is a contract between the issuing company and the bondholder. The company must pay interest on the bonds on specific dates, and it must return your principal at the bond's maturity date. Both of these factors stabilize the value of corporate bonds. Stocks don't provide the same level of commitment to shareholders, as a company can suspend dividend payments, and investors have limited recourse other than selling the stock.
Bond issuers have contractual obligations to bondholders that are much more stringent than obligations to shareholders.
This starts with the bond issuer's obligation to pay interest on time, which is typically semi-annually. If a
company stops paying its interest to bondholders, the issuer could be deemed to have caused an 'event of default,'
which could enable bondholders to take certain actions to obtain their interest payments and/or a return of their principal.
Stocks do not have these same obligations, and companies can, at the drop of a hat, suspend dividend payments to stockholders.
Many retirement investors need to know that recurring interest or dividend payments will continue to be paid, which is why corporate bonds can be a more compelling investment opportunity for retirement investors seeking a reliable income stream. It wasn't too long ago that General Electric had a AAA credit rating and was one of the world's most valuable companies. Today, it is a shell of its former self and has cut its quarterly dividend to $0.01 per share. If this can occur at one of the world's most valuable companies, no stockholder is immune from dividend cuts or eliminations.
When investors buy stock of a company, there is no guarantee that the company will repay the investor anything. The stock
could go up and it could go down depending on the company's performance and market conditions.
The face value of a corporate bond is $1,000. When a bond matures, the issuing company owes the bondholder the face value of the bond he purchased. This provides corporate bond investors with a much higher level of principal security relative to stockholders.
In addition, bondholders are more senior in a company's capital structure than stockholders. In the event of a bankruptcy, stockholders typically get wiped out where bondholders will usually recover a portion of their principal depending on the value of the company and what other debt obligations it has.
Being senior in a company's capital structure and having a contractual obligation to receive the bond's face value at maturity provides corporate bondholders a greater level of principal protection than that of stockholders.
On any given day, people can invest in nearly 9,000 different corporate bonds, approximately double the number of publicly
traded stocks. We expect this enhanced level of investment choice to continue, as corporate bond issuance remains strong
and the number of companies going public through initial public offerings (IPOs) has waned, falling 67% from 1999 to
2017. The number of publicly traded stocks recently hit a 35-year low, having decreased 45% from 1996 to 2015.
While 2018 corporate bond issuance fell to $1.3 trillion vs. $1.6 trillion in 2017, the record 2017 issuance levels were a 3.5x increase from 1997. In Q4 2018, companies sold over six times more in bonds than they sold in stock. At the end of 2018, there was approximately $9.2 trillion of corporate bonds outstanding, which is 2.4x the size of the municipal bond market and nearly 60% the size of the United States Treasury market.