The only difference between investment grade bonds is the credit rating behind the company issuing them. High yield bonds are typically rated ‘BB’ or lower by Standard & Poor’s and ‘Ba’ or lower by Moody’s. High yield bonds can usually offer 5% or higher returns, which is much better than investment grade companies.
For example, Advanced Micro Devices, Inc. (NASDAQ:AMD) is issuing bonds with coupons in the range of 6% to 8%. AMD is a household name in the technology community. It’s stock price went up nearly 250% over the last 5 years. Meanwhile Bank of America, which has a higher rating of BBB by Fitch, only issues lower yielding bonds around 3% to 4%.
A good filter to use when deciding which company to invest in is setting a minimum market capitalization of $5 billion. This lowers the chances of a default on the bond because the stock of the company has to reach $0 before bond holders are at risk of losing all their money.
It is true that in order to seek out higher returns one must necessarily also take on more risk. However, there are different levels of risks. It’s up to the individual to decide whether or not the extra 2 or 3 percentage points of return is worth the additional risk. Foreign bonds and high yield bonds may be less popular than dividend stocks or traditional fixed income vehicles, but they can turn out to be valuable investments for well informed investors.
This author does not own any shares or bonds of AMD, and does not plan to own either within 72 hours of writing this article.
This article has been republished with permission from Modest Money.