Bond Growth Investing: Bonds to the Rescue

Why should dividends have all of the fun inside of your growth investing portfolios? Is there a way to mirror dividend growth in our bond portfolios?

The answer is yes and no. However, bonds can be a great addition to anyone’s passive income and growth portfolios, but they take a little more education than DGI stocks.

Full disclosure; this will be a more advanced topic. If you don’t understand bonds, ensure you read “The Bond Book” and “Step-by-Step Bond Investing.” I also link to the tons of bond articles I have written.

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The key components of a DGI portfolio. Dividend growth investing is pretty simple at its core. You pick great companies that have a solid track record of paying dividends. Next, you will dollar-cost average into these stocks for years. The critical components of DGI are:

1. Dollar-cost averaging
2. Dividend reinvestment
3. Dividend increases by the company
4. Stock price appreciation

The key components of a BGI portfolio. We can mimic most of these components in our bond growth investing portfolio. However, you will have to do something we don’t do in DGI; time the market.

The main difference in BGI is that we can’t just keep buying bonds for years and years. We have to buy when yields are high. Luckily, we can track the Federal Reserve Funds Rate to see when to buy.

What is Quiet Quitting?

How do we diversify our BGI portfolio? In the DGI, you purchase stocks in different business sectors to ensure you don’t have glaring holes or weaknesses.

With BGI, we will focus on treasuries, municipal bonds, bond funds, and baby bonds. Bond yields move very closely together because the Federal Funds rate and treasuries set the pace.

1. Series “I” Bonds – Dollar-Cost Average section
2. 30-Year Treasury Bonds – Income section
3. Municipal Bond Funds – Tax-Free section
4. Treasury Bond Funds – Capital Gains section
5. Junk Bonds – High-Yield section
6. Baby Bonds – High-Yield section

1. Series “I” Bonds. Series “I” Bonds are a great starting point for our BGI portfolio because we can dollar-cost average into these over the years. We have a $10,000 annual limit on our purchases, however.

Series “I” Bonds automatically keep pace with inflation, and we cannot lose money on these instruments. This is the “all-weather go-to” element of our BGI and the base of operations. 

2. 30-Year Treasury Bonds. For the rest of the bond elements, you must pick a starting yield to purchase them. I set my starting point at 4%. 

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This line in the sand means you do not purchase bonds at less than 4% (or whatever you set). Bonds have highs and lows, and you can lose money if you sell at the wrong time.

Generally, your high-yield bonds are worth more in a low-yield environment. So if you buy 4% 30-Year bonds, they are worth more when the 30-Year benchmark is 1.5%.

It may take ten years to return to a zero-interest-rate environment, so buying these bonds for income is essential. Earning a safe 4% is a luxury we haven’t seen in over ten years. You can swap 30-Year bonds with 2, 10, or 20 years to reduce duration risk. 

Dividend Investing in Your 70s

3. Municipal Bonds Funds. These funds give us a tax-free element. If you live in a state with no state tax (Florida), you have a tax-free solution. 

You will want to buy these funds at a yield that will hold up over time. I like anything over 3% because it is much higher when considering the tax exemption. You can turn on dividend reinvestment if you’d like here. 

4. Treasury Bond Funds. Treasury Bond Funds can give you massive capital gains if you buy at the right time. My favorite bond fund is Vanguard Long-Term Bond Fund (BLV).

What is Generational Wealth?

I bought a ton of shares when the price was $110 during the pandemic. The yield was roughly 1.5%. Today, these bonds are severely underwater; however, I learned my lesson.

I need to buy these bond funds when yields are 3.5% or higher. Currently, the price is closer to $70. I know these bond funds can push past $110 in share price the next time we enter a zero-interest-rate environment.

Essentially, I buy now for the 3.5% yields and hold them until bond prices rise to ridiculous levels. It may take 10-15 years to enter a ZIRP (zero interest rate policy), so we have to be smart on our purchases. 

40-Year Interest-Only Mortgage

5) Junk Bonds Funds. These are high-yield corporate bonds. My favorite is SPDR High-Yield Junk Bond (JNK). These are similar to Treasury Bond Funds, which you must buy at the right time.

Instead of the 3.5% yield on my treasury fund, the target will be closer to 5%. There is a bad time to buy these, so learn the charts and buy when yields are high.

6) Baby Bonds. Finally, we come to the highest yield segment of our portfolio. We can also get limited capital gains on baby bonds if we buy below their face value (say $25).

We can use bond reinvestment from any of the above securities to purchase baby bonds. For example, we can use the income from our 30-Year bonds to purchase high-yield baby bonds. 

You Can’t Get Rich by Acting Rich

Our income will go through the roof if we diligently buy baby bonds. I currently have one baby bond in my portfolio (HROWL), but it yields over 8%. 

It all comes together. I am still fleshing out my BGI strategy. I like having some bonds on the stock market, some away from the stock market, and some baby bonds. 

When the bonds function together, we get an excellent yield and outstanding capital gains opportunities when ZIRP shows up again.

Roth IRAs vs. HSAs

Conclusion. Nobody can predict the next time we will see ZIRP in America. In the meantime, we can collect yields over 4% safely.

The next time there is ZIRP, you want to be a seller of bonds, not a buyer. I bought tons of bonds during the pandemic. Now, I am at a loss. 

However, I continue to learn and study bonds because it is fascinating. The Bond market is much larger than the stock market, and bond yields tell the story of the economy.

Getting into bonds will give you deeper insight into where we are heading as a nation. Few people will understand bond growth investing, but for those who do, keep at it. Good Luck!

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