Investing in bonds can be difficult because companies usually sell them in $1,000 or more increments. Thus, we typically turn to US Treasuries or Bond funds to allocate bonds.
However, some bonds trade in denominations of $25, $50, and $100—making them accessible to the average investor.
Welcome back to the Investing for Interest series (101, 102, 103, 104), and today we will talk about Baby Bonds. More importantly, how can we find these magical investments?
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What are baby bonds? Baby bonds are company bonds in denominations less than $1,000. The baby bonds we discuss don’t trade on the bond markets but the stock market. The crazy part is that they look identical to preferred stock.
Baby Bonds vs. Preferred Shares. Since these two types of securities act similarly, I will discuss how to invest in them later. First, let’s look at the differences.
Unless you read an article, it’s hard to spot the difference between baby bonds and preferred stock. They both usually trade in denominations of $25. Their par value is what the company will pay you if they call (return) your shares.
Because baby bonds are debt, they are higher on the debt structure than preferred shares. Preferred shares are equity; thus, they pay dividends. Baby bonds are debt; thus, they pay interest.
The rarity of baby bonds. Since I read the book “The Billionaire’s Secret” in October 2020, I have invested in preferred shares. The yields on preferred stock are incredible if you buy when the market is down.
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Over the years, I started seven positions in different preferreds. However, I have only found one baby bond, and it wasn’t even at an excellent price.
Baby Bonds are difficult to find. Usually, if you hunt for preferred shares on Seeking Alpha, you may stumble upon a baby bond.
Other than paying interest and dividends, the two securities are 95% the same. So, let’s review preferred shares since I have covered them on my website for over 1.5 years.
What is preferred stock (and baby bonds)? Let’s do a quick refresher of preferred shares for those new to this type of security. Luckily, I have a five-part series titled Preferred Shares 101 that you should read directly after this article.
- Preferred Shares 101: Getting Started with Preferred Shares
- Preferred Shares 102: Terms are Important
- Preferred Shares 103: The Rule of 72
- Preferred Shares 104: The Search for Shares
- Preferred Shares 105: Long Term Preferred Strategy
In short, preferred stock has a par value, usually $25. When companies issue these shares, they set the dividend payment.
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The cool part is that once these securities hit the stock market, they fluctuate in price. If you purchase them below the par value (less than $25), the dividend payment remains unchanged.
This dynamic means that you can buy preferred shares and baby bonds at insanely good dividend (and interest) yields. You just have to follow the market, trust the company’s prospects, and wait for a buying opportunity.
A high-yield example. My favorite example, and one I always use, is GLOP.C. At par value ($25), GLOP.C offers an attractive 8.5% yield. But we want more!
I built a position in GLOP.C at $15.96, giving me a yield on cost of 13.35%. Even better, the value of my shares increased by 57.87%. Just amazing.
You can find deals like this if you look hard enough. You will just have to perform due diligence on the companies. Don’t buy a crap company for the yield.
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Using baby bonds (and preferred stock) in an income portfolio. You will want to use baby bonds in a high-yield income portfolio. These aren’t long-term dividend growth vehicles.
I also wanted to use these as the anchor of your income portfolio because the company can call them at any time. I like to use closed-end funds and mortgage REITs as the anchors to my portfolio.
I also like to sprinkle in some high-yielding blue chips like Phillip Morris (PM), AT&T (T), and Altria (MO) to my income portfolio. These offer stable, consistent dividends with a slight possibility of growth.
Baby bonds and preferreds can sit over the top of your portfolio as nice-to-haves. You can track them and buy them at the opportune moments—getting the highest yields possible.
From there, you happily collect the dividends. If the company calls them, you celebrate because you earn those juicy capital gains. You want to have a few positions in preferred shares and baby bonds—this way, if one disappears, you’ll still have income.
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If you lose a baby bond or preferred stock, you can take your capital gains and invest in something like USDC stable coin as you wait for more golden opportunities to arise. Life is good when you have a plan.
Conclusion. Baby bonds are rare and hard to find. However, if you continue to invest in preferred stock, you will eventually run into them. When you run into them, ensure you know how to evaluate the company, the call date, and the yield on cost.
Baby bonds are easy to invest in because you are not trying to predict capital gains. If you buy a good company below par value, you will win. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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