Warning: Bonds Are Riskier Than You Might Think

by Hilary Kramer | December 20, 2012 1:00 pm

Bonds have been on a tear in recent years for two reasons: First, they are considered safer than stocks, and with all of the headlines from Europe’s debt crisis to the U.S. fiscal cliff, investors are fleeing to the perceived safety of bonds. Second, with interest rates having been so low for so long, investors are desperate for higher returns than the measly rates on CDs, savings accounts, etc., so they’ve gobbled up bonds.

However, there are a few problems. Just like the stock market, the bond market is supply and demand. The more people want to buy bonds, the higher the price you have to pay. And the higher the price you pay, the lower your yield is. That’s why 10-year Treasuries yield only about 1.8%.

The reality is that now is a dangerous time to buy most bonds, and they could end up doing more harm than good for investors. Interest rates have nowhere to go but up. When that happens, whether it’s a long time coming or rates starting to tick up sooner than people expect, the value of the bond decreases. You can hold the bond and collect the current yield, which is still low in many cases, but if you need to sell it, you will probably end up losing money. Those who buy now are buying high, and chances are good that many of them will have to sell low.

The emphasis on safety in recent years has more and more people turning to bonds, which has created a bond bubble. That, in turn, makes bonds less safe than many people assume they are. When that bubble bursts, which it inevitably will, those who are heavily invested in bonds will take the biggest hit.

That’s exactly what happened a couple of decades ago. In the early 1980s, the stock market crashed and investors were hit hard. They flocked to the safety of bonds, which ended up being anything but safe because interest rates exploded causing bond prices to drop.

History tends to repeat itself, as I discussed on a Fox Business appearance, so I would be very wary of bonds right now.

If you’re looking for solid income and stability and have a long-term investing horizon, quality high-dividend stocks are better options in most cases. With the bubble, bonds are no longer as safe as they used to be, and many dividend-paying stocks kick out higher yields than bonds anyway.

3 High Dividend Stocks to Buy Now

I’d like to share three companies with a high-dividend yield that will give you a higher return.These stocks have done really well, and you definitely don’t want to miss out on an opportunity to buy them.

BlackRock (NYSE:BLK[1]) is in the investing business. In fact, it’s the world’s largest asset management firm, and clearly knows how to give back to their shareholders. This stock is a great choice to bring in a higher dividend. BLK has a 3% yield and improved earnings per share by 13% in the most recent quarter. It is a solid stock that has a history of paying high dividends.

Waste Management (NYSE:WM[2]) is a recession-proof business. Whether the economy is booming or barely hanging on, people still need to get rid of their trash. It is not going away anytime soon, and with a strong 4.2% dividend yield, it pays out much more than bonds. That payout could easily increase again since the Board of Directors recently approved a 2.8% increase in the quarterly dividend rate, from 35 cents per share to 36 cents per share.

McDonald’s (NYSE:MCD[3]) may not be the healthiest places to eat, although they have improved their menu a bit, but they sure do have a healthy business. Currently, they have a 3.5% dividend yield and are known as one of the “dividend giants.” After reporting that the franchises will be open during Christmas, shares increased 0.68%. The stock has been on a decent run this past month, and is definitely worth a look.

Yes, bonds are popular right now, but being popular isn’t always a good thing. I suggest that you be very wary of bonds right now and consider high-yield dividend stocks instead.

  1. BLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=BLK
  2. WM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WM
  3. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD

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