Bonds vs dividends.
A story about folks snapping up Wal-Mart bonds.
Take a look at the bond issue. Wal-Mart sold $750 million worth of three-year bonds paying 0.75% a year. It sold $1.25 billion of five-year bonds paying 1.5%, $1.75 billion of 10-year bonds paying 3.25% and $1.25 billion of 30-year bonds paying 5%.
Remember that those bond coupons are subject to two hidden costs.
First, bond interest is taxed as ordinary income. That means that if the bonds are held in a taxable account, they will be taxed up to 35% right now -- and as high as 39.6% next year if the Bush tax cuts expire as planned.
Second, bonds face a serious risk from inflation. Who wants a piece of paper paying 5% a year for 30 years if inflation jumps to 7%? Nobody. If that happens, the price of the bond would plummet.Compare that to common shares of Wal-Mart and their dividend.
I have some Preferred shares and have avoided the treasury bonds other than shorting them with the TBT which I think is going to take off at some point in the next year or two. Thanks for all the great Bakken info, I own quite a bit of KOG less of SSN and LEI.
ReplyDeleteThank you for your kind comments.
ReplyDeleteOne of things I like best about hearing from folks is what they are invested in. I try very, very hard to just report the facts about the companies and the drilling operations. I try hard not to step on any toes. (I have been hard on a couple of companies over the past two years.)
Having said that, depending on when you got into KOG, you have done very, very well. Put up a comparison chart on Yahoo!Financial with CLR, KOG, and NOG for past two years of performance, and you will be quite amazed.
Again, thank you for stopping by.
One old saw was that 2% of the population had 98% of the wealth. This is based on corporate bonds which few individuals purchase. I've never encountered a person who had a corporate bond or preferred stock. They are just too "clunky" for the individual.
ReplyDeleteThe situation with corporate bonds and preferred stock has become worse since the Obama auto bailout when the bankruptcy rules giving preference to corporate bonds and preferred stocks were ignored.
Except for the "A list" companies have had a hard time corporate bonds and preferred stock due to the Obama auto bailout precedent. What exactly are the bankruptcy recovery preference "rules" nowadays? We don't expect Wal-Mart of Microsoft (which just sold some 1% bonds) to go broke. For everyone else a "credit crunch".
Actually, the corporate bonds are the realm of pension funds and 401K type plan conservative investing options. If you think long term the solid interest rates aren't that bad. In the case of pension, ect. funds, as I understand it, taxes are payable as income when the individual gets the pension payments or withdrawn from the IRA after retirement.
The Wall Street rating system took a huge credibility hit after the the big Wall Street rating houses gave the subprime tranches an "investment grade" rating before the crash.
I doubt most retail investors are able to follow the nuances of investing in bonds. All I know is that buying Wal-Mart 3-year bonds paying 0.75% borders on ....
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