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What exactly is a "baby bond"? It's a bond offering where the face value of the bond usually is $5,000. That makes a baby bond offering more attractive to retail investors.
Source: 401(K) 2012 via Flickr
There is also one other aspect to a baby bond offering, which is that they often trade just like stocks do.
This is of incalculable value for those interested in bonds, but who had to rely on diversified ETFs or had to pony up at least ten grand to buy an individual bond. The other great thing about these securities is that, as corporate bonds, they pay very attractive yields.
As with all corporate bonds, though, you have to be careful to choose companies that are solvent and not in danger of default. Without the protection of diversification, you carry more risk.
One other thing: distributions are paid and taxed as interest, not dividends.
Baby Bonds to Buy: eBay Inc. 6% Notes Due 2056 (EBAYL)
You've certainly heard of eBay Inc (NASDAQ: EBAY ). eBay issued a baby bond in February of last year that pays 6%. As with most such issues, this baby bond carries an S&P rating of BBB+, which is described as, "An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation." With the + added on, it obviously means one level above that.
The actual title of the baby bond is eBay Inc. 6% Notes Due 2056 (NASDAQ: EBAYL ). The official yield is 6%, however because the issue trades at $26.13, the current yield is about 5.7%. Interest is paid on the first of February, May, August and November. Also, the notes themselves are due in 2056, but they can be called in 2021.
Baby Bonds to Buy: National General Holdings Corp. (NGHCZ)
Another baby bond worth looking at is National General Holdings Corp. 7.625% Subordinated Notes Due 2055 (NASDAQ: NGHCZ ). There are few businesses in the world that are better than insurance. As long as underwriting is done properly, insurance companies provide reliable returns.
National General is a fairly straightforward insurance operator that provide auto, health, homeowners and umbrella policies for businesses and individuals. Its net income has been growing impressively, it has ample free cash flow, and thus these subordinated notes seem like a good bet.
Remember, subordinated means that other forms of debt have precedence should the company get into fiscal trouble. I don't see how that would happen, though. The current yield is 7.5%. The issue is unrated, and is callable in September of 2020. Payment dates are the 15th of March, June, September, and December.
I like this issue and I would also suggest taking a look at the stock itself.
Baby Bonds to Buy: Verizon Communications (VZA)
Next up we have Verizon Communications 5.9% Notes (NYSE: VZA ). In this case, you have little to worry about because Verizon Communications, Inc. (NYSE: VZ ) generates so much free cash flow - anywhere from $12.9 billion to $21.9 billion annually - that it seems highly unlikely that this baby bond isn't going to get paid.
In fact, even after subtracting the $8.5 billion in common stock dividend payments it made last year, VZ still had $13 billion left over in cash flow. The yield is 5.6%, because the bond itself trades at $26.13. Like most other baby bonds, it also carries that BBB+ rating from S&P.
I want to add one other thing about VZA vs. VZ itself. VZA is a good choice if what you are really seeking is just the distribution. Most of these baby bond issues trade like bonds, in fairly narrow ranges, which limit your likely capital loss.
The common stock of VZ pays less, but as an equity, is subject to more volatility.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years' experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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