Income Investing Today: Safety and High Income Through Diversification

Foreword xiii

Preface xv

Introduction xvii

1 The Why and How of Fixed Income 1

Why Consider Fixed Income 1

Growth versus Income (Stocks versus Bonds) 1

What Kind of Investor Are You? 4

Investment Strategies 5

Asset Allocation 5

The Right Allocation for You 6

Diversification 7

Retirement Planning 11

What’s Exciting about 6 Percent Returns? 14

What You Need to Know about Risk and Uncertainty 17

Subjective Risks 18

Objective Risks 19

Uncertainty 20

Understanding Interest Rates: General Features 21

Compound Interest 31

When Interest Rates Rise 32

Comparative Yields Explained 34

What to Pay: Fair Value Pricing 38

When to Sell 40

Using Leverage and Margin 43

Credit Ratings 43

Below-Investment-Grade Ratings 46

How to Read the Ratings 49

Credit Ratings Drift: An Ongoing Problem 51

The Federal Reserve Bank 52

Security Dealers and Brokers 56

2 Information Sources and How to Use Them 59

Investment Advice via the Media 59

Prospectuses 60

Misuse of the English Language 64

Getting Railroaded by China 66

When to Worry about the Accounting 69

Financial Statements 71

Balance Sheet 73

Income Statement 75

Statement of Cash Flows 76

Shareholders’ Equity Statement 77

Defining Earnings 78

More Important than the Numbers 79

Summary 80

3 Bonds 81

Basic Features 81

U.S. Treasuries 83

Corporate Bonds 88

Equipment Trust Certificates 90

Direct Access Notes 90

Junk Bonds 92

Step-up and Pay-in-Kind Bonds 93

Zero-Coupon Bonds 94

Put Bonds 95

Insured Municipal Bonds 96

Lower Rated Muni Bonds 99

Conduit Bonds 100

Taxable Munis 100

Unrated Munis 101

Buying Municipal Bonds 103

Municipal Bond Defaults 104

Miscellaneous Topics 105

The Bond Indenture and Trustee 105

Call Provisions 106

Put Provisions 109

Money Market Accounts and Funds 110

Certificates of Deposit 111

Duration 111

Questions to Ask When Buying a Corporate Bond 113

Questions to Ask When Buying a Muni 114

4 Preferreds and Hybrids 117

General Features 117

Hybrids: Bonds/Indirect Bonds 118

Preferred Equity Traded (PET) Bonds 118

Trust Preferreds 119

Third-Party Trust Preferreds 120

Foreign Preferreds 121

Partnerships 121

Perpetual Preferred Stock 122

Buying Preferreds 122

5 Convertibles and Adjustable-Rate Debt 127

Convertible Bonds 127

Convertible Preferreds 129

Adjustable-Rate Debt 132

6 Income Stocks 135

Overview 135

Canadian Energy and Royalty Trusts 136

Other Canadian Trusts 138

Real Estate Investment Trusts (REITS) 139

Other Common Stocks 140

7 Mutual Funds 143

Overview 143

Bond Funds 145

Junk Bond Funds 147

Municipal Bond Funds 148

International Bond Funds 149

Exchange-Traded Funds (ETFs) 149

Closed-End Funds (CEFs) 152

Closed-End Bond Funds 153

Closed-End Preferred Funds 154

Buy-Write Funds 155

8 Securities and Other Investments to Avoid 157

Unit Investment Trusts (UITs) 157

Derivatives 158

SEQUINS and ELKS 160

PARRS 161

Hedge Funds 162

Commercial Paper, Bankers Acceptances, and Repos 164

Collateralized Debt 164

9 Other Topics of Interest 167

Bankruptcy 167

Endgame Strategies 173

Tax Strategies 174

Dividend Strategies 175

Taxation and Mandatory Convertible Preferreds 176

Tax Reporting 177

Original Issue Discount 180

10 Summing Up 183

A Long-Term Strategy for Income Investing 183

Appendix Internet Investment Information Sources 189

Glossary 199

Index 227