What will happen to dividend yield of Bond funds when interest rates go up?

[rsingh6675]

I have a question about dividend yields of Bond funds when interest rates start going up? I have some bond funds which pay good dividend & I want to keep them for long term, just to keep receiving monthly dividend yields. Will the dividend (monthly payout) go down if the bond prices fall? These funds have been paying dividends every month. Example----
VWLTX----4.28%
FNMIX-----6.3%
VFIIX-----3.1%
AFB-------6.5%
PMM------6.8%

[ziggy29]

For the most part (assuming no defaults), the *current* dividend yield of bond funds (dividends as a percentage of NAV) will rise, not fall. Note that this isn't saying the dividends increase -- just the yield.

If you took a fund with a $10 NAV that paid out 50 cents in interest per year (5%), and its NAV fell 10% to $9, in the absence of other factors that 50 cent dividend is now a 5.56% yield (based on *current* NAV, not based on your cost basis).

[dex]

Quote:

Originally Posted by rsingh6675 I have a question about dividend yields of Bond funds when interest rates start going up? I have some bond funds which pay good dividend & I want to keep them for long term, just to keep receiving monthly dividend yields. Will the dividend (monthly payout) go down if the bond prices fall? These funds have been paying dividends every month. Example---- VWLTX----4.28% FNMIX-----6.3% VFIIX-----3.1% AFB-------6.5% PMM------6.8%

Are the above the SEC yields for the the funds or are they based upon your cost basis for the fund?




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[Nords]

Quote:

Originally Posted by rsingh6675 II have some bond funds which pay good dividend & I want to keep them for long term, just to keep receiving monthly dividend yields. Will the dividend (monthly payout) go down if the bond prices fall?

Quote:

Originally Posted by ziggy29 For the most part (assuming no defaults), the *current* dividend yield of bond funds (dividends as a percentage of NAV) will rise, not fall. Note that this isn't saying the dividends increase -- just the yield. If you took a fund with a $10 NAV that paid out 50 cents in interest per year (5%), and its NAV fell 10% to $9, in the absence of other factors that 50 cent dividend is now a 5.56% yield (based on *current* NAV, not based on your cost basis).

Rsingh, you're mixing the vocabulary with the concepts.

The only things that reduce the amount of your dividend check are when a bond matures or is called (and no longer pays dividends) or defaults. One of those things inevitably happens to the bonds in a bond fund, but generally they're happening to such a tiny fraction of the fund's total holdings that you won't notice the effect in your monthly check.

When interest rates go up, the prices of existing bonds go down because their interest rates aren't such a good deal anymore. However those bonds keep paying out the same dividend amount so you still get the same-size checks every month. Because the size of the dividend remains the same, then when the prices of existing bonds go down their yields go up.

Note that in Ziggy's example you're still getting 50 cents, so the amount of your dividend check doesn't change. However the bond fund will show that it actually has a higher yield, unfortunately because each share of the fund is now worth a lower price. If you're keeping the shares then you don't care about the price, and if no more bonds default than usual then your dividend check stays the same.

One more piece of trivia: many investors measure their yields by the price they paid for the shares (their cost basis), not the current value of the shares. So if interest rates go up, the yield on your cost basis remains the same because you're getting the same dividend check on the price you originally paid for the shares.

[rsingh6675]

These days there is Bond Bubble scare. I have bot only Mutual funds & CEF's. No individual bonds. I also need to keep receiving monthly dividend checks & keep my funds even though the price starts falling (as long as I get my dividend check). These days everyone is talking about getting out of bonds. What about bond funds? If I get out of bond funds & CEF's, then what to buy to keep getting monthly income?
Thanks.

[jayc]

Quote:

Originally Posted by rsingh6675 These days there is Bond Bubble scare. I have bot only Mutual funds & CEF's. No individual bonds. I also need to keep receiving monthly dividend checks & keep my funds even though the price starts falling (as long as I get my dividend check). These days everyone is talking about getting out of bonds. What about bond funds? If I get out of bond funds & CEF's, then what to buy to keep getting monthly income? Thanks.

If interest rates rise, bond funds will go down. Individual bonds will also go down. But if you hold the individual bond until maturity you will get face value and no loss of principal if you bought at par or below.

'Everybody is talking about getting out of bonds' to me would be getting out of bond funds, not individual bonds.

I did sell my individual bonds about 6 months ago because the price was 5% above face value.

[brewer12345]

Something to be careful about with CEFs: many of them have borrowed money to invest. The usual game is to borrow short term and invest long term. If short term rates go up, dividend payouts can be hurt. Pay close attention to the leverage in your CEFs.

[Nords]

Quote:

Originally Posted by rsingh6675 These days there is Bond Bubble scare. These days everyone is talking about getting out of bonds.

I think most of that sentiment is coming from bond traders trying to get in & out of bonds for short-term capital gains. They don't care (much) about dividends.

If you're holding bonds as part of your asset allocation and not for short-term trading then I wouldn't worry about it. If a CEF is leveraged as Brewer suggests then perhaps you'd want a CEF that doesn't leverage up as much.

If the idea of bond bubbles is making it difficult for you to sleep at night then you'd need to replace that asset class with something that makes you feel more comfortable. However if you sold your bond funds and put the money in long-term CDs then you'd probably be getting less in dividends.

[Fantasm]

I have a quick question about individual bonds/preferred shares.
I bought an energy companys preferred shares at par cost of $25/share.
They pay 8.75% dividend until the year 2069 when I will get full principal repayment (it was sold as a bond, but i see it listed as preferred shares now, so that makes me confused too).
The stock is now about $29.40/share.

If I buy more shares of it at the $29.40 price, will they still pay dividend to me on these new shares even though I am buying it after their initial offering is closed and I am buying them (most likely) from another investor?

I want to do this because the 8.75% return is nice, and when I have free cash, I might as well buy more of these preferred shares to get nice return on them.

[traineeinvestor]

Quote:

Originally Posted by rsingh6675 I have a question about dividend yields of Bond funds when interest rates start going up? I have some bond funds which pay good dividend & I want to keep them for long term, just to keep receiving monthly dividend yields. Will the dividend (monthly payout) go down if the bond prices fall? These funds have been paying dividends every month. Example---- VWLTX----4.28% FNMIX-----6.3% VFIIX-----3.1% AFB-------6.5% PMM------6.8%

I can't speak to these particular funds, but for the typical bond fund, yield on cost (being the actual dollars distributed) will intitially remain unchanged. However, it may either (i) fall if reduced asset values and reduced fund size results in an increase in MER (because not all fees/expenses are a % of net assets) or (ii) rise as reinvestment (if any) and new money is invested at the new higher interest rates.

Yield relative to the NAV would be expected to rise as the NAV falls in response to higher interest rates.

[brewer12345]

Quote:

Originally Posted by Fantasm I have a quick question about individual bonds/preferred shares. I bought an energy companys preferred shares at par cost of $25/share. They pay 8.75% dividend until the year 2069 when I will get full principal repayment (it was sold as a bond, but i see it listed as preferred shares now, so that makes me confused too). The stock is now about $29.40/share. If I buy more shares of it at the $29.40 price, will they still pay dividend to me on these new shares even though I am buying it after their initial offering is closed and I am buying them (most likely) from another investor? I want to do this because the 8.75% return is nice, and when I have free cash, I might as well buy more of these preferred shares to get nice return on them.

Yes, the stream of interest payments travels with the ownership of the bonds, so if you buy from another investor you still get the money.

But if you buy at $29.40, you don't get 8.75% return you get a 7.44% current yield because you are paying over par for the bond/preferred. You also have the certain knowledge that you will lose $4.40 between now and maturity (if you are still alive) because you paid that much more than the bonds will pay out when they mature. So your return will be more like 7%.

I would also look closely at whether the bond is callable earlier by the issuer (I would guess that it is).

What you own is known as a "hybrid." It is technically a bond, but it is a deeply subordinated instrument that may even allow the issuer to stop paying for a while without it being considered a default. So legally it is a bond, but it is as close as you can get to a preferred without actually being one.

[veremchuka]

bond bubble i think is very misleading. tech stocks were in a bubble in 1999-2000 and when it broke they dropped what 70% +/-. when housing was in a bubble house prices dropped what 40-60% depending upon the region of the country. when equities are in a bubble they can drop a lot. bond funds probably are not at a price that is low, to the contrary they are high now because yields are so low. this is why talking heads refer to bond bubbles, rates have nowhere to go but yp. bonds and bond funds will not drop 50-75% in value when rates rise. their existing price/nav will go down and the longer the duration the more the price/nav will drop. if you hold actual bonds your coupon will remain constant assuming the bond doesn't default. if you have a fund the nav will drop, short term the least and long term the most. but bubble? no.

[ltrout]

If I'm hearing the foregoing correctly, the bond fund (excepting defaults) will continue to return the original "dividend" based on cost regardless of the normal fluctuations in interest rates. I'm sure its more complicated than that--especially if a flood of new fund participants buy into the fund at the market low (yield high) and reinvestment rates overtime--but it seems that a well diversified, large fund with a fairly short duration is a good bet for income. With the caveat that you do not intend to withdraw funds after the markets have dropped.

[heeyy_joe]

Quote:

Originally Posted by Fantasm I have a quick question about individual bonds/preferred shares. I bought an energy companys preferred shares at par cost of $25/share. They pay 8.75% dividend until the year 2069 when I will get full principal repayment (it was sold as a bond, but i see it listed as preferred shares now, so that makes me confused too). The stock is now about $29.40/share. If I buy more shares of it at the $29.40 price, will they still pay dividend to me on these new shares even though I am buying it after their initial offering is closed and I am buying them (most likely) from another investor? I want to do this because the 8.75% return is nice, and when I have free cash, I might as well buy more of these preferred shares to get nice return on them.

You can check out this site for good particulars on preferred shares:

www.quantumonline.com

[clifp]

Quote:

Originally Posted by ltrout If I'm hearing the foregoing correctly, the bond fund (excepting defaults) will continue to return the original "dividend" based on cost regardless of the normal fluctuations in interest rates. I'm sure its more complicated than that--especially if a flood of new fund participants buy into the fund at the market low (yield high) and reinvestment rates overtime--but it seems that a well diversified, large fund with a fairly short duration is a good bet for income. With the caveat that you do not intend to withdraw funds after the markets have dropped.

For a bond fund, as interest rates raise, bonds that mature will be reinvested at higher rates, so that if you hold say 1,000 share of bond fund and spend the income every month your income will raise. But the value of each share will drop as explained above.

The problem right now is almost no bond fund provides good income.
Vanguard Short Term Index Bond Fund .53%
Intermediate 1.91%
Total Bond Market 1.64%

Considering the S&P has a yield of 2.1% and dividends are likely to increase in the 5-8% range this year, I think stock provide better income.

[REWahoo]

Quote:

Originally Posted by clifp For a bond fund, as interest rates raise, bonds that mature will be reinvested at higher rates, so that if you hold say 1,000 share of bond fund and spend the income every month your income will raise. But the value of each share will drop as explained above. The problem right now is almost no bond fund provides good income. Vanguard Short Term Index Bond Fund .53% Intermediate 1.91% Total Bond Market 1.64% Considering the S&P has a yield of 2.1% and dividends are likely to increase in the 5-8% range this year, I think stock provide better income.

Good update on yields, and very timely since this thread just came back to life after being in hibernation for more than two years...

[Midpack]

For those who hold this:

Vanguard Short-Term Investment-Grade Fund Admiral Shares 1.17%

Sad sign of the times.

[haha]

Quote:

Originally Posted by Midpack For those who hold this: Vanguard Short-Term Investment-Grade Fund Admiral Shares 1.17% Sad sign of the times.

What is the duration of this fund?

Ha

[photoguy]

2.3 years.

VCSH is similar with 1.2% sec yield and duration = 2.9

[haha]

Thanks