Screening for High-Yield Corporate Bonds
Thursday, March 5th, 2009I have typically used dividend yield as measure of a company’s financial strength, as it is easily available from Yahoo! Finance or Google Finance. Recently, I have noticed that most companies with high yields have been slashing them. (GE has been the latest.)
Although it seems to have become fashionable to cut dividends, it is not so easy to stop paying yields on bonds. I think of it as cutting your weekly dinner-and-a-movie on the one hand and not making the minimum payment on your credit card on the other. The latter has lasting effect on your credit. Furthermore, in a liquidation, bond holders get paid before stock holders.
So I started looking for high-yield corporate bonds, using E*Trade’s screening tool. When I brought it up, I looked for bonds yielding 15%-25%. The other fields in the form I left at their default values.
I was quite surprised to find a large number of bonds with this level of yield. In the past, these yields have only been available on low-rated bonds.
I kept raising the ratings…
…until I got a reasonable number…
This is what I expected some months ago…with credit being hard to come by, bond yields are going up. Too bad it has taken so long for this sign of rationality to appear.
Most of the companies that come through this screen have a significant financial services business. High yields reflect risk in (and distrust of) their balance sheets. It is astonishing that investing in the world’s largest financial institutions has become comparable to venture investing: you simply assume that a large portion of the companies you invest in will go out of business, and hope that the remaining companies will (more than) compensate.