Perfect dividend portfolio: Why bonds matter?
As there is no much talking about bonds, it is sometimes easy to forget about them, yet they should be part of every balanced portfolio. They are basically loan-like contract where we as investors borrowing money to different companies and governments. While owning stock means owning piece of company, owning a bonds means owning a piece of the loan contract with borrowers. Those borrowers are obligated to pay your money back with an interest. This is the reason why bonds are generally considered as a fixed-income investment. Unlike stocks they promise fixed and stable payments to the holder.
This means that while stocks can offer higher dividends, bonds are offering lower, but more reliable dividend payments. But dividend in case of bonds are not the same as dividends from a company. Technically, dividends are an interest payment. This is a most important difference between those two types of dividends.
Famous Ray Dalio all-weather portfolio consist of 55 % bonds (15 % intermediate-term + 40 % long-term). But percentage for every individual should vary. Generally speaking, as you get older you should put more money into bonds. The same applies if you expect the stock market to crash. We consider bonds as amazing way to hedge yourself against market downturns.
Bonds are in most cases purchased through bonds ETF. Bonds ETFs consist of many different bonds carrying different levels of risk. You should always check the composition of the bonds ETF before buying it. Highest rating is "AAA" which basically means more trustworthy borrowers and less interest for us. As you go on to lower ratings, both risk and revenue are higher. Usually are bonds ETF distributed in relatively safe categories, but you can also find a more risky bond ETF with majority of bonds below rating B.
If you are interested in possible revenues, you can calculate bonds ETFs in calculator. We will show you bond composition and estimated future earnings.