Collect Bigger Bond Income -- the Easy Way
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some bonds to your portfolio, the PowerShares Fundamental Investment Grade Corporate Bond ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is a low 0.22%, and it yields about 2.2%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF doesn't have a sufficient track record to evaluate, though, as it's rather new. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why corporate bonds?
Investing in bonds is a fine idea for many of us, especially if we want to diversify our long-term portfolios. But these days, Treasuries offer paltry interest rates. Thus, consider higher-yielding corporate bonds, as many of them are tied to companies that are rather unlikely to go under anytime soon.
Lots of promising companies offer tempting bonds. A peek inside this ETF reveals some examples, many of which have performed well lately, and some of which may do well soon.
KeyCorp , for example, has seen its stock surge 44%, and its bond held by this ETF yields 4.3% until maturity in 2021. The bank has been performing well, but not perfectly (its efficiency ratio is above average, for example). It has partnered with other big banks to develop mobile banking, and has just sold off its Victory Capital Management business, which should generate at least $100 million, much of which will be used to buy back stock. (The buyback seems reasonable, as the stock seems undervalued right now.) Its latest quarter featured a drop in earnings due to downsizing costs and acquisitions. Its dividend yields 1.9%, and was hiked by 10% earlier this year.
Xerox has experienced a 39% jump in stock price over the past year, and the Xerox bond that the ETF owns currently yields 3.6% to its 2018 maturity. With a forward P/E near eight, and a 2.3% dividend (hiked by 35% earlier this year), the stock seems a solid value. Xerox has been retooling itself in recent years, aiming for higher margins. It's already generating more than $2 billion in free cash flow annually. It now gets a big chunk of its revenue from services instead of hardware, including some long-term government contracts. For example, the woman-led company processes Medicaid claims for all of California. Xerox recently bought an e-learning company, too, and a pension administration software business.
United Parcel Service stock has jumped 24%, and its dividend yields 2.9%, the same rate as the UPS bond that this ETF owns, which currently yields 2.9% to its 2021 maturity. The future of UPS seems rosy, as e-commerce grows, and thus the number of deliveries grows. The company is chasing new revenue sources, too, such as 3-D printing, which it will be offering in its stores. Meanwhile, though, UPS has been experiencing weakness in its high-margin next-day service, and its second-quarter report featured earnings down a bit over year-ago levels on soft freight and international deliveries.
Altria has seen its stock gain 5%. Its bond yields 4% to its 2018 maturity, and its dividend is even higher, recently at 5.7%. Altria has rewarded shareholders greatly in the past, but it now faces challenges such as rising taxes, regulations, competition from discount cigarettes, a shrinking smoker base, and even counterfeit cigarettes. In its latest quarter, , revenue shrank 3.8%, while earnings rose 5%. Meanwhile, some fear that the FDA might tighten regulations on (or even ban) menthol cigarettes, which drive a lot of revenue. A possible revenue booster is the growth of electronic cigarettes. Still, its customers are literally addicted to its cigarettes, which is a strength.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
This isn't the only interesting ETF out there. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report, "3 ETFs Set to Soar." Just click here to access it now.
The article Collect Bigger Bond Income -- the Easy Way originally appeared on Fool.com.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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