In today’s highly uncertain and volatile climate, corporate fixed-income securities, including bonds, provide investors with the ability to diversity their portfolio from equities, while also securing a regular and stable income stream.
In this article, we outline 3 key reasons why investing in corporate fixed-income today could be beneficial for your portfolio right now.
Reliable Income Stream
As mentioned, corporate fixed-income securities provide a reliable income stream that is known from the outset. Unlike dividends, which can be slashed at will by a company’s management, issuers of fixed-income securities have a legal obligation to pay investors.
These payments, called coupons, are usually paid quarterly, semi-annually, or annually, providing investors with a stable and regular income stream. This aspect makes corporate fixed-income particularly appealing for retirees and other investors who require consistent cash flow.
Why Now?
Interest rates have risen spectacularly over the last year, slamming the breaks on growth assets.
At the time of writing, the ASX 200 is currently trading at similar levels to May 2020 while the U.S S&P 500 and NASDAQ are both still trading below 2021 highs.
Conversely, the returns available on corporate fixed-income securities have increased materially, offering investors with attractive fixed rate returns of 6-8%pa.
The Risks
It’s important to stress that while there is a legal obligation for the issuer of a corporate fixed-income security to pay investors, there is no guarantee they can or will. In the event that an issuer becomes insolvent or defaults, coupon payments will stop and some or all of the principal investment may also be lost.
Portfolio Diversification
A well-diversified investment portfolio is key to managing risk, and corporate fixed-income can play a significant role in diversifying the overall investment mix.
Like government bonds, corporate fixed-income securities are impacted by interest rates, but there are various other factors like credit quality which impact their performance.
As such, corporate fixed-income investments can behave quite differently to other fixed-income asset classes, providing an added layer of diversification and enabling investors to spread their risk more effectively.
Why Now?
With ongoing economic and geo-political uncertainty, a balanced portfolio which is weighted towards defensive assets including cash, government bonds and corporate fixed-income, can help to offset some of the volatility in equities and other growth assets.
The Risks
While allocating to corporate fixed-income can provide enhanced portfolio diversification, it can also introduce new risks which need to be considered, especially when it comes to the credit quality of the issuer. This is why it’s important to speak with a specialist adviser who can explain the idiosyncrasies of each security.
The Risks
While higher interest rates can be beneficial for fixed-income investors, they can be detrimental for corporations who have large amounts of debt to service. This increases the risk that a corporate issuer can default on its obligations, which can put investment capital at risk.
How the Australian Bond Exchange Can Help
If you are interested in learning more about how corporate fixed-income securities work and how they can be generally used within investment portfolios to complement other asset classes, contact an adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.