Bond Dividend Allocation

[jazz4cash]

If I buy or sell a bond on the secondary market, how is the dividend allocated?

Let's say it's a semi-annual dividend payable Jan 1st and Jul 1st. I buy the bond on April 1st (e.g. 1/2 way through the dividend period). Does the seller get 1/2 of the dividend payable Jul 1st? If so how and when is the payment made?

Thanks

 

[pb4uski]

What you will pay is the price of the bond plus accrued interest from the last interest payment date to the date that you buy it.... then when you receive the interest payment, your net interest will be from the day you bought it to the interest payment date.

So let's say the bond is $1,000 par value and 5% coupon and pays $25 interest each Jan 1 and Jul 1. If you buy if for $950 on Apr 1, you'll pay $950 +$12.50 accrued interest. When you receive that $25 interest from the issuer on Jul 1, your net interest of $12.50 will represent interest from Apr 1 - Jun 30.

 

[jazz4cash]

Thank you. That makes sense. I am buying a muni in the secondary market for the first time.

 

[njhowie]

Thank you. That makes sense. I am buying a muni in the secondary market for the first time.

Can I ask which one(s) you have your eyes on?

Be sure to research first.

Also, spreads have widened. Buyers have gotten a bit more power recently with liquidity issues which continue to persist. So, don't simply/immediately pay the ask - unless you are getting a really good price.

 

[jazz4cash]

Sure. I bought two NYC Transit Revenue issues with 18mo and 5 yr maturity. The 5 yr was above par but both yield ~4%. Tiny amount invested. I could hear your your advice on bidding below ask in my ear when I placed the order but I got lazy since it was a tiny purchase. The 1st order filled immediately so I bought another and it did the same. I have nothing left to spend. These look very good as supplements to my CD ladder. I see a few others that look interesting. I’m honing my skills on Fido’s bond tools but I believe there are better resources for research.

I am starting to fully embrace the idea of having a dozen or so issues for diversification. I’m not sure I could handle 20 but I’ll round it out with a muni income fund (~2.5%). I recall someone here saying they had 100 individual bonds. No way.

I wish the experts would develop a thread like we have for preferred and CD/MM/bank deals.

 

[njhowie]

When the market opened today I bought the 11/15/2022 MTA bonds.

I was bidding on them all afternoon yesterday and the dealer would not budge. By the same token, nobody was taking them from him. First thing this morning, I put my lowball bid in again and the dealer started coming down. I went up a little, he came down a little, I went up a little more and then he accepted.

https://emma.msrb.org/Security/Details/?id=59259YCB3

I recall someone here saying they had 100 individual bonds. No way.

That could have been me. However, the vast majority of the bonds (all munis) I hold are pre-refunded issues - no risk, as good as the treasury securities which back them.

 

[njhowie]

I’m honing my skills on Fido’s bond tools but I believe there are better resources for research.

emma.msrb.org is just about the best resource - it contains all of the filings, from the official statement, along with all of the disclosures/filings over time. Fidelity does have a link to it from the muni details page on the right below the Official Municipal Documents where the link says "Official Statement (PDF)".

Alternatively, you can just go to emma.msrb.org and enter the CUSIP for your bond.

bondlink.com is also pretty good, though I have not utilized it as much as emma.

If you are looking for even more information, you can go to the municipality's or issuer's website and hunt down the information or financials you are looking for. There are a few issues I've held where I'd go to the municipality's website, and then sift through their meeting minutes, financials, or other information they may have there which were not filed with MSRB.

 

[Mr._Graybeard]

I've been eyeballing those NYC transit bonds. Schwab has had maybe a dozen listed over the past couple days. I may get in there yet. What are New Yorkers going to do, take a cab?

Schwab's secondary bond listings were down for a couple days late last week, which was annoying.

 

[njhowie]

I could hear your your advice on bidding below ask in my ear when I placed the order but I got lazy since it was a tiny purchase.

The key to being successful bidding below the ask is to get to a price where it is below the ask, you are getting a good discount off that original ask, and the dealer still makes something on the trade. You can look up the trade history for the bond, and can generally figure out what the dealer paid for the bond(s). Generally, all else being equal, I will start bidding half way between what he paid and what he's asking.

If you bid below the price that the dealer paid for the bonds, it's extremely unlikely you will get them. However, if (for example) interest rates have gone higher from the time the dealer bought the bond, maybe he bought 2 weeks ago and has not been able to unload, it's possible he could offer a price lower than what he paid, but that doesn't happen very frequently. Using the trade history, you can also tell if the bond trades actively, or infrequently. If it trades infrequently, and the dealer has been trying to sell for some time, then you have a much better chance of purchasing below the ask ... if you have enough patience to play the cat and mouse game with the dealer.

 

[jazz4cash]

The key to being successful bidding below the ask is to get to a price where it is below the ask, you are getting a good discount off that original ask, and the dealer still makes something on the trade. You can look up the trade history for the bond, and can generally figure out what the dealer paid for the bond(s). Generally, all else being equal, I will start bidding half way between what he paid and what he's asking.

If you bid below the price that the dealer paid for the bonds, it's extremely unlikely you will get them. However, if (for example) interest rates have gone higher from the time the dealer bought the bond, maybe he bought 2 weeks ago and has not been able to unload, it's possible he could offer a price lower than what he paid, but that doesn't happen very frequently. Using the trade history, you can also tell if the bond trades actively, or infrequently. If it trades infrequently, and the dealer has been trying to sell for some time, then you have a much better chance of purchasing below the ask ... if you have enough patience to play the cat and mouse game with the dealer.

That is very helpful, consistent with my gut instinct but still needed some affirmation. I've used the book view and emma link to glean some bits of useful info but can't escape the feeling of "do I really know what I'm doing?" The trade activity seems almost too transparent at times. I realize I am picking up crumbs that are too small for even serious individuals not to mention institutions. Suits me fine! Pre-refunding and defeased traits are among the things I am trying to get a better feel for.

When I mentioned better resources than Fido, I was referring to an experience I had when searching for a bond with particular characteristics. I could not find one on Fido's site, but I used another search tool (Zion Direct, I think or Hennion and Walsh) to identify the CUSIP and could then get access at Fido

 

[njhowie]

When I mentioned better resources than Fido, I was referring to an experience I had when searching for a bond with particular characteristics. I could not find one on Fido's site, but I used another search tool (Zion Direct, I think or Hennion and Walsh) to identify the CUSIP and could then get access at Fido

emma.msrb.org does also provide a good query tool. You can create an account on the site, and then you can save your queries so you can easily go back and rerun them.

https://emma.msrb.org/Search/Search.aspx

 

[njhowie]

When I mentioned better resources than Fido, I was referring to an experience I had when searching for a bond with particular characteristics. I could not find one on Fido's site, but I used another search tool (Zion Direct, I think or Hennion and Walsh) to identify the CUSIP and could then get access at Fido

I'm stating the obvious, but in the event you didn't see it, Fidelity does also provide query capability for municipal bonds currently in their inventory, which has most of the parameters I see at H&W.

Go to the following link, and then click on "+ Show more criteria" on the left below the dropdown for State/Territory:

https://fixedincome.fidelity.com/ftgw/fi/FILanding#tbindividual-bonds|municipal

 

[jazz4cash]

Ok, thanks....I had not noticed the show more criteria option before.

 

[jazz4cash]

njh
Do you have any experience with Hennion and Walsh? I know they are based in Jersey. They sold me my 1st muni on a cold call and it was a great buy but after that they never came through with any more decent bonds or anything else of value. Their website was decent. It was a PITA getting beneficiaries recorded and after awhile I just moved the bonds to Fido and they reimbursed the fee that H&W charged for the xfer. I guess I was looking for a regional broker relationship and I probably wasn't big enough to get that sort of treatment from them.

 

[njhowie]

njh
Do you have any experience with Hennion and Walsh? I know they are based in Jersey. They sold me my 1st muni on a cold call and it was a great buy but after that they never came through with any more decent bonds or anything else of value. Their website was decent. It was a PITA getting beneficiaries recorded and after awhile I just moved the bonds to Fido and they reimbursed the fee that H&W charged for the xfer. I guess I was looking for a regional broker relationship and I probably wasn't big enough to get that sort of treatment from them.

Sorry, never heard of them before you mentioned it and I checked out their site.

I've dealt with Fidelity, Etrade, and Merrill Edge for municipal bonds. Etrade is the worst. Fidelity is the best, and Merrill Edge has it's strong points, but Fidelity is still better.

Give Fidelity a chance, you'll warm up to it. If you want more of a relationship, you can call and ask for the fixed income desk and they will do whatever you ask, help you out, probably even make recommendations based on what you're looking for - regardless of the size of your account.

 

[jazz4cash]

I’m definitely sticking with Fido for purchase and custody. I had a sense that a regional
Broker might bring some value to local munis but it didn’t work out that way. I’m just looking other places for research and guidance. The munis appear to be an excellent complement to my CD ladder and it feels like I can get a comfortable level of diversification without too much work.

 

[COcheesehead]

The muni market over the last 3-4 weeks has been fun.

 

[COcheesehead]

I second using Fidelity. Great tools and easy to use to buy bonds. Cheap too $1 a bond.

 

[njhowie]

The muni market over the last 3-4 weeks has been fun.

Definitely!

 

[jazz4cash]

Definitely!

+2
Around the weekend of 3/18 I noticed that my only muni bond which I bought at par and was priced around 110 had dropped to 96. My only regret with this bond was that I had not bought more. I couldn't quite figure out what to do. The market was closed and I had no dry powder anyway. I called Fido 1st thing Monday thinking maybe I could buy on margin or but the hold time was excessive. That was the same time NFCU relaxed their EWP to permit withdrawal from CDs without penalty so I scraped a bit off of a 2.7% CD that was set to mature in August. It took over 10 days before I had check in hand (shoulda paid the wire xfer fee....it might've even been waived). By that time all the extreme discounts appeared to be gone but I decided to expand my criteria to include out of state issues and I started finding some attractive deals. I am learning and adding parameters for munis to my IPS.

 

[njhowie]

I am learning and adding parameters for munis to my IPS.

I think that as you learn, you'll find that the muni market is a great place for picking up solid investments, with good returns, for relatively low risk. Though the market is dominated by large funds and institutions, there is a place for individual retail investors and I believe those who know what they are doing actually have a distinct advantage over the big boys. I have numerous good stories and successes. I'm sure that COcheesehead does as well.

 

[COcheesehead]

I was absolutely giddy for a few hours on one of the mornings. High quality, short duration and long duration muni’s were on sale. I bought as much as I could. The deals sort of continued for a few more days and overall I put another $200k to work in my ladder, but there were a golden couple of hours that one morning where I could not believe the deals in front of my eyes.

 

[jazz4cash]

I think that as you learn, you'll find that the muni market is a great place for picking up solid investments, with good returns, for relatively low risk. Though the market is dominated by large funds and institutions, there is a place for individual retail investors and I believe those who know what they are doing actually have a distinct advantage over the big boys. I have numerous good stories and successes. I'm sure that COcheesehead does as well.

I am struggling a bit to grasp the effect of buying munis below par (de minimis rules?). It does not apply for any of my purchases so far. I had no clue. I got lucky, but my buys are tiny.

 

[COcheesehead]

I am struggling a bit to grasp the effect of buying munis below par (de minimus rules?). It does not apply for any of my purchases so far. I had no clue. I got lucky, but my buys are tiny.

Bonds upon maturity always return to par. So below par purchases are the locked it, guaranteed return. Interest payments just add to the return.

Think of it as buying a stock at $90, that is more or less guaranteed to return to $100 plus dividends.

 

[Mr._Graybeard]

I think that as you learn, you'll find that the muni market is a great place for picking up solid investments, with good returns, for relatively low risk. Though the market is dominated by large funds and institutions, there is a place for individual retail investors and I believe those who know what they are doing actually have a distinct advantage over the big boys. I have numerous good stories and successes. I'm sure that COcheesehead does as well.

Actually, individual investors play a big part in the municipal bond market. This report from the Municipal Securities Rulemaking Board combines individual investors and nonprofits as a single category, but as of 2018 the two groups held more muni debt than mutual funds, banks, ETFs and brokers combined. http://www.msrb.org/msrb1/pdfs/MSRB-Brief-Trends-Bond-Ownership.pdf

So, the little guys have a chance in the muni market, perhaps, because they are the muni market.