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What Role Do Individual Corporate Bonds Play in Income Investing?

Individual corporate bonds are a crucial component of income investing, as they provide yields generally higher than Treasury bonds, muni bonds, and stocks.  While the total return opportunity for corporate bonds can be less than stocks, a corporate bond's coupon stays the same for the life of the bond, whereas a stock's dividend can go up or down over time.  This makes a corporate bond's income stream more reliable than that of dividend stocks. 

Owning individual bonds helps income investors create a more precise investment plan than is possible with bond funds and ETFs.  More aggressive investors could select bonds with lower perceived credit quality and/or a long time to maturity.  These bonds can be more volatile, but they generally offer higher income and greater upside than short-dated investment-grade corporate bonds.  Individual bond investors can also diversify across different industries, which is generally not possible with the mega bond funds such as the Vanguard Total Bond Market Index Fund, VBTLX.  

When you own an individual corporate bond, you have a contract with the bond issuer to pay you a fixed rate of interest and to return to you the $1,000 par value of each bond you own on the maturity date.  This enables investors in individual corporate bonds to build a reliable income stream, as compared to bond funds and ETFs, whose income streams can be less predictable since the underlying holdings can change over time.

What's more, many income investors have used dividend stocks as a primary source of income investing.  Unfortunately, as shown during the COVID-19 health and financial crisis, dividend payments are not guaranteed.  During this time, scores of blue-chip companies either suspended or significantly reduced their dividends.  Companies that suspended or reduced their dividends included: Disney, Boeing, Ford, Delta Airlines, Freeport McMoRan, Macy's, Darden, Anheuser-Busch, Nordstrom, and many more.  All of these companies continued paying interest on their bonds, which shows why corporate bonds are such an important part of income investing.

A key benefit to BondSavvy's bond investing strategy is that we seek to complement the income investing portion of a corporate bond's return with capital appreciation.  We maximize total returns by recommending what we believe are undervalued corporate bonds that offer compelling yields and can increase in price.  Please view the BondSavvy corporate bond returns page to see how our investment returns compare to those of the leading corporate bond ETFs.  


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