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Not a figment of your imagination: Bond yields of 4 to 7.5 per cent.
They're out there in the corporate bond world. To find them, keep an eye on the hot and cold stocks of the day. Two examples: Sherritt International on the hot side, and TransAlta Corp. on the cold.
TransAlta, a mid-size player in the utility sector, turned off investors recently by cutting its dividend to 18 cents a quarter from 29 cents and announcing a quarterly loss. The shares were down 6 per cent for the year to early April, a period in which the S&P/TSX composite index was up about 6 per cent. The dividend yield on TransAlta shares is still high at 5.7 per cent, which reflects lingering investor concern about the company.
Now, what about TransAlta bonds? One online broker recently listed a series maturing Nov. 18, 2019, for sale with a yield of 4.2 per cent. A TransAlta strip bond maturing the same date carried a yield of 4.3 per cent. TransAlta was listed as having a triple-B credit rating, which means it's investment grade and thus not considered a speculative bond. Still, a 4.2-per-cent yield from what amounts to a 4.5-year bond stands out in today's investing world. The benchmark for corporate bonds, the iShares DEX Canadian Corporate Bond Index, has a yield of close to 3 per cent.
Default risk is a primary consideration when looking at corporate bonds. With TransAlta, you can take comfort from the fact that the company's newly lowered dividend will improve its financial position. Also, the company does not appear to be over-burdened paying that dividend. Globeinvestor.com shows its dividend payout ratio is in line with other utility players. If paying dividends isn't a heavy load for a company, then there's little for bondholders to worry about.
Sherritt, a global mining company, has been absolutely pounded in recent years in the stock market. But with one big brokerage firm boosting it to "outperform," the shares have surged in the past month or so. The bonds have likewise done well, which means the yield on Sherritt's bonds has fallen (bond prices and yield move inversely).
Sherritt bonds are high yield, which means below investment grade. They have traded at prices that yielded about 8 per cent, but recently the yield for the series maturing Nov. 15, 2018, has fallen to 7.5 per cent. What you're getting here is a still-ample stream of income from a speculative bond that investors are getting more comfortable with.
Finding bonds likes these can be always be done by screening your way through your online broker's bond inventory. Or, you can keep your eye on hot and cold stocks of the day.