One of the most common objections I hear about bonds is “Why would I invest in bonds when I can get CBA with a dividend yield of 5.41%?”.
Investors in retirement need to be more protective of their capital. They simply cannot afford the same amount of risk in their portfolios as younger investors who are still employed.
Unfortunately, many retirees continue to "run with the bulls" and invest high percentages of their portfolio in growth assets where income and prices can fluctuate.
Investors in retirement need to be able to plan their lives and to do that they need certainty of income. They need low-risk investments with salary-like cash flows so they can pay bills and live the way they have been accustomed to prior to retirement.
Bonds provide the certainty that retirees need.
There are three different types of bonds that can be used in portfolios to suit different economic conditions but I would suggest having an allocation to all three to protect your portfolio no matter what happens to interest rates.
Investors in fixed rate bonds know upfront the returns they can expect over the life of the bond. These bonds pay half-yearly interest payments and are very protective in a declining interest rate environment.
Income for floating rate and inflation-linked bonds varies as the bonds are linked to the bank bill swap rate and inflation, respectively. Therefore, if investors think either interest rates or inflation will rise, then these bonds would suit their portfolios. Both bonds pay interest quarterly.
Investors who need a certain minimum quarterly or monthly income can devise a portfolio to suit their needs.
To demonstrate, if we assume an investor invests $252,575 in a bond portfolio with five bonds, they can manipulate the choices they make so that the bonds provide a steady, consistent cash flow.
The table below shows a sample portfolio and the projected cash flow it will produce for the next year.
Projected Cash flows
National Wealth Management
Source: FIIG Securities
Note: The Sydney Airport inflation linked bond assumes inflation is constant at the RBA target midpoint of 2.5%
Cashflows for floating rate and inflation linked bonds accurate as at September 10, 2014 but subject to change
I have purposely invested in bonds to provide a smooth income of around $3,000 per quarter to demonstrate how the choices of direct investing can benefit investors.
The first bond to mature in the portfolio is the National Wealth Management subordinated debt, which matures in 2016 when your cash flow is boosted by $50,000, at which time you may choose to reinvest in another bond. I have attached a copy of this portfolio so you can see how FIIG builds and presents portfolios.
G8 Education then matures in 2019, Stockland and Sydney Airport in 2020 and DBCT in 2021. Total projected cash flow for your $252,575 investment over the next seven years would be $321,268. Total yield to maturity is 5.22%, certainly better than current term deposit rates on offer.
These bonds are not listed on the Australian Securities Exchange. They are only available through the over-the-counter bond market.
The bond market in Australia is valued at $1 trillion and is part of a huge global market.
To be able to buy these bonds you need to have a relationship with a bond broker or dealer such as FIIG Securities. At FIIG, we enable access to the bond market for a minimum upfront investment of $50,000 (bonds can be purchased from $10,000 per bond).
Opening an account is easy and can even be done online by clicking here. To make this as easy as possible we have a dedicated team here in Sydney to assist you along the way.
Investing in growth assets has its rewards but a fixed-income portfolio that provides known returns provides a lot of certainty for your future.
You can view the Investor Profile of two of our happy customers who rely on FIIG to manage their fixed income investments. Gary and Gayle represent FIIG’s typical client looking to obtain reliable stable income with capital stability in mind.
Please feel free to contact me for a confidential discussion about what sort of bond portfolio FIIG can put together for you.
Warm regardsAngus Knight
Dealer – Fixed Income Sales