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In this podcast, Motley Fool senior analyst Bill Mann discusses:
In addition, Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp analyze the ins and outs of buying bonds.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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Chris Hill: TikTok is a private company that’s causing problems for some of the biggest public companies. Motley Fool Money starts now. I’m Chris Hill. Joining me today, Motley Fool senior analyst Bill Mann. Thanks for being here.
Bill Mann: Hey, Chris. How are you?
Chris Hill: I’m doing well. The two biggest players in digital advertising are unsurprisingly Google and Meta Platforms, but it appears that their collective bigness is getting a little smaller. According to industry analysis reported by Axios that this year, the two companies are going to bring in less than half of all digital advertising in the U.S. That’s the first time since 2014 that that has happened. They are still dominant, but their dominance is coming down a little bit and there are few ripple effects I want to get to. But I think first and foremost, Bill, if you are a shareholder of either Alphabet or Meta Platforms, how concerning is this to you?
Bill Mann: I would describe it as being at least partially concerning. There are two places where most of the incursions have come. The first is what very broadly is called e-commerce, but you could very specifically call it Amazon doing their own ads, and the other place is TikTok. TikTok has taken a pretty substantial market share, especially among the types of consumers that advertisers most favor. The 30 and below tend to do searches using TikTok rather than Google or Facebook or any of the other search engines, so it is a bit of a sea change. It’s also important to note that it is still a rapidly growing, rapidly changing industry. So I wouldn’t describe it as a four-alarm fire, but they should, in fact, wonder where that warmth is coming from.
Chris Hill: I want to get to TikTok in a second. But first, one of the things we’ve heard and maybe it’s the proximity of where we live relative to Capitol Hill. But over the past decade or so, we have heard various drumbeats around big tech monopolies. Alphabet and Meta Platforms are very much on that list. If you are working in the corporate law offices of either of these companies, are you quietly heartened by this? Because it makes the monopoly case against them a little bit harder, doesn’t it?
Bill Mann: Are you going with the bad news as good news argument?
Chris Hill: I’m trying not to do that. Let’s just go with if this is, as you said, it’s not a four-alarm fire, but it’s partially concerning. Is that a silver lining here?
Bill Mann: Let’s be clear. Neither you nor I are lawyers in general, much less antitrust lawyers, but we do have to think about this and I do want to make sure that we’d say that so that anybody who isn’t antitrust lawyer out there isn’t saying, well, that’s not correct. But I think that probably here in the U.S., these companies being American companies have seen a fairly substantial protection against antitrust. Where they really have had to worry has been Europe, where being protective of Google, and Facebook, and Apple if you want to throw another one into the mix, there’s not really been an upside to the downside. Yes, I think this actually probably gives them a little bit more of an argument, but it’s called a duopoly for a reason and that reason is still that 50% of a $30 billion market is still a massive, massive market share. It may actually give them a little more cover to operate. I don’t know that it gives them any cover to do what you would want companies to do in times like these when market prices are depressed, which is to go out and go shopping. I think they still would have a pretty substantial argument against being allowed to do much.
Chris Hill: Let’s go back to TikTok for a second because we have seen just over the past month or so a couple of state governments ban government employees from having TikTok on their devices. There is legislation moving somewhere through the United States Congress to do the same at the federal government level where. Do you see this going? If you had to bet on an outcome, what would you be betting on?
Bill Mann: Man, it is inarguable to me that TikTok as the leading product of a Chinese company called ByteDance is in fact tracking us in ways that we may be incredibly uncomfortable with if we put a lot of thought into it. There are also arguments to be made that TikTok, at this point, supports so many small businesses in the U.S. that it has become unbannable, that it’s something too big to fail, too big to ban. I’m not sure that I’d buy that. I do think that the argument needs to come down to one of protection and I just don’t know that the will is there at this point in time to make that happen.
Chris Hill: I can think of several companies that would be thrilled at the news that TikTok is —
Bill Mann: It’s possible. We’ve talked about a couple of them.
Chris Hill: I did, let’s just call it a hyperlocal poll of the three younger people in my family, and I just posed to them like, “Hey, just indulge me for a second. Let’s just say TikTok went away. Let’s just say it went away,” and of course they were immediately like, “Wait, is it going away?” I’m like, “No, just work with me. Let’s just say it’s going away, where would you go for short-form video?” and all three of them pointed to YouTube Shorts in part because of the way that Google and YouTube are really pushing short videos. I’m sure that’s part of it, but I guess, to your point about is TikTok unbannable, that has to be part of the equation. Part of the equation for any regulator thinking about that, part of the equation has to be like, well, wait, who’s going to benefit from this? Right, the big tech companies just get more dominance in a platform where they’re getting their butts kicked at the moment.
Bill Mann: Yeah, I think that’s exactly right. I mean, I think in the short term, they would benefit. I mean, if you think about TikTok, it came out of nowhere and in an environment in which we would have already said, and it is almost always a mistake to do this to say, well, the race is over and Google and Facebook have won. The race is never over. So I would suspect that if TikTok is banned, it would be a very quick jelly doughnut-like shot in the arm for these companies in their own platforms. But people are going to congregate someplace else, and I would suspect that that someplace else isn’t someone’s garage right now or it is fairly low in the App Store right now and may not be something as large and an unwieldy as an Instagram or YouTube.
Chris Hill: Bill Mann, always great talking to you. Thanks for being here.
Bill Mann: Hey, thanks, Chris.
Chris Hill: It’s not just stocks that have had a rough 2022. Bonds have as well, but that means corporate debt is on sale. Robert Brokamp and Alison Southwick discussed the ins and outs of buying bonds.
Alison Southwick: When the stock market drops, in our heart of hearts, we hope it will recover because it always has in the past. The problem is, we don’t know exactly when, or to be honest, even if. That’s because there are no guarantees with equities, and this can be pretty distressing for investors. Fortunately, there are investments that like stocks can go up and down in value, but are contractually obligated to return a certain amount of money on a certain date, and right now, many of those investments are selling at a discount. Yes, we are talking about boring old bonds. They’re not nearly as exciting as stocks, but believe it or not, the bond market is actually bigger than the stock market. Partially because investors like what bonds provide: reliable income and relatively low volatility. At least that’s what they usually provide. This year has been very different. The Bloomberg U.S. Aggregate Bond index has lost more than 10% in 2022, making this the worst year for the index since its inception in 1977.
Robert Brokamp: Yeah. It’s been a pretty rough year for bonds and thanks largely to the Federal Reserve, which has been in hiking rates since March, and when rates go up, bond prices go down because who wants to pay full price for a bond yielding 2% when I can go out and buy a new bond yielding 4%. But here’s the deal. Many bonds are now trading for 90 to 95 cents on the dollar and their prices will rise as they get closer to the maturity date, which is the date that the bond holder gets the money back. They’ll get the full value of the bond, otherwise known as the par value. You throw in the highest yields we’ve seen in over a decade and you get a decent return on a usually safe investment.
Alison Southwick: I suspect most of our listeners understand that you probably shouldn’t have all your money in the stock market, especially if you’re close to or even in retirement. Most of us have probably seen bond funds in our 401(k). So is a mutual fund or an ETF the best way to go when it comes to buying bonds?
Robert Brokamp: Yes and no. I think that’s the way most people buy bonds, but buying an individual bond may be a better choice if you want to be very certain about how much interest you will receive, and how much money you’ll get back in the future when the bond matures. Most people haven’t spent much time buying individual bonds, so you may wonder, well, how do you do it? So you can buy individual Treasuries directly from Uncle Sam, commission-free at Treasurydirect.gov and Treasuries are considered the safest investments in the world. If you look at the bond area of your discount broker website, you’ll likely see a whole inventory of Treasuries, corporate bonds, municipal bonds, and if you’ve never bought individual bonds before, you may see some terms you’re not familiar with. So let’s discuss an example. I checked one of my accounts and I see a bond that is trading with the following information.
So it’s offered by the Simon Property Group, which is a real estate investment trust focusing mostly on retail properties throughout the world. You’ll see the name of the bond and then what you’ll see are ratings from the ratings agencies, and the agencies are generally Standard and Poor’s, Fitch, and Moody’s. Basically, the ratings are the agency’s assessment of the risks that a company will default on its bond obligations. So the ratings range from the best at AAA. That means very, very low likelihood of default, all the way down to single D, that’s the lowest. That means this company is hanging on by a thread. There’s also a dividing line at triple B, so anything with that rating or above is considered investment grade. Anything below that rating is considered speculative, otherwise known as junk. If you’re going to buy individual bonds, I think you’re best to stick with investment-grade bonds. Now, this bond from Simon Property Group is rated with a single A. That’s good.
It means it has likely a low risk of default, doesn’t mean it can’t default, but according to the ratings agencies, it’s a very low-risk. Then the next thing you’re going to see when you look up a bond is its coupon. This bond has a coupon of 3.3%. That is the amount of interest paid as a percentage of the bonds full or par value. The term coupon harkens back to the days when investors actually bought paper bonds with several coupons attached and to get the interest, you actually had to bring the coupon into a bank. But the coupon rate is not the current yield on the bond. Because for this bond, the price of the bond is trading at a discount. Specifically, its price is 95.8% of its par value. When you look up the price of a bond, the way they’re priced is always a percentage of the par value. So what you really want to look for is the yield to maturity, which for this bond is 4.7%.
That’s closer to the actual return you’ll receive. It’s a combination of the interest payments and the increase in value of the bond as it moves back to 100% of its par value on the maturity date, which for this bond is Jan. 15th, 2026, so a little more than three years from now. Now, you’re considering this bond from the Simon Property Group, you may also look at its stock, which has a dividend that is currently yielding a very impressive 6.2%. So you may wonder why buy a bond that will return below 5% when I can buy a stock with a higher yield that also has higher price appreciation potential? Of course, the answer is, you could have much more faith and the return you’ll get from the bond.
As long as the company is still in business, you’ll definitely get the interest and a bit of price growth because it’s trading at a discount over the next three years. Actually, the stock, who knows what the stock will be worth three years from now, or how much the dividend will be? Plus, if the company does go under, bondholders get paid back first and the typical recovery is about 25% to 50% of the value of the bond. Shareholders get paid last and they usually lose their entire investment. So that’s just one example. As you look at the inventory of bonds offered in your brokerage account, you’re going to find plenty of issues selling for 90% or less of their par value. Therefore, you’ll get the growth and the income when the bond matures, assuming the issuer is still in business, and that last part is important. Even highly rated bonds can default, so diversification is just as important with the bond portfolio as it is with the stock portfolio.
Alison Southwick: So yeah, diversification. A bond fund does seem like the easier option because I get instant diversification with a single investment and it also seems like a lot less work.
Robert Brokamp: Yes, it is. Learning to buy individual bonds can take some work. You definitely take the time to educate yourself. Also buying bonds below or above par value in a regular taxable brokerage account, so not an IRA, can create a variety of tax issues, so you’d want to make sure you learn more before you begin your bond buying venture. You do get a ton of it diversification with a bond fund, for example, the Vanguard Total Bond Market ETF owns more than 10,000 bonds. On top of that, according to Morningstar, the weighted price of those bonds is 89% of their par values, which means most are trading at discounts. You can also look at the fund’s yield to maturity, which is 4.9%. That’s a helpful hint as to what the returns could be, especially when you’re comparing one fund to another. But it’s also a bit misleading because the fund won’t actually hold all those bonds maturity.
In fact, this is the primary downside of a standard bond fund. Holdings are traded in and out of the fund throughout the year, so investors don’t really know how much the fund will be worth in the future. But there’s a relatively new solution. Target date bond ETFs. These are funds that only own bonds that mature in the same year. While the share price of the fund will go up and down with interest rates and if you own corporate bonds also the overall economy, they tend to return to their initial net asset value or share price, or maybe even a bit higher when the ETF liquidates after all the bonds have matured, so the two main issuers of target date bond ETFs are BlackRock which calls them iShares, iBonds, and Invesco, which calls them BulletShares. Let’s talk about the history of the iShares iBonds, Dec. 22, corporate bond ETFs. That’s the one that is just maturing this month.
Its inception was in March of 2015 at a share price of $25. It only owns corporate bonds that matured in 2022. The share price throughout the last seven years definitely moved up and down, especially during the pandemic panic of 2020. But now that we have reached the end of the maturity year of the ETF, it is returned to its $25 share price. In fact, the fund is now all cash and it soon will be disbursed its shareholders, and then the fund will cease to exist. Now, if you’re looking for one to invest in now for the next few years, let’s consider the iShares iBonds, December 2026 corporate bond ETF. That’s one it’s going to mature in four years, holds 513 bonds currently trades at $23.50, so at a discount of its initial share price, and it has a yield to maturity of 5%, because all the bonds will mature in 2026. You can feel reasonably confident that you will earn approximately 5% annualized if you hold this fund until 2026, barring some significant economic downturn that results in like a huge wave of defaults.
Alison Southwick: Hey, Bro. Let’s wrap this up with talking about how much should someone invest in bonds.
Robert Brokamp: It’s a general rule of thumb here at the Fool is that you should have 5%-10% of your portfolio out of stocks as a starting point. Once you are within a decade of retirement, maybe consider having 25% to 35% out of stocks, and then once you’re retired, perhaps 35% to 45% out of stock. Of course, as always, depends on your circumstances, your risk tolerance, and whether you have other resources like a pension or something like that. That non-stock money should include both cash and bonds. For money you want to keep absolutely safe and liquid cash is still the best bet, especially with high-yield savings accounts nowadays offering 3% or higher. For money you need in the next year to actually individual Treasuries are pretty hard to beat these days. The rates are over 4.5% plus the interest is free from state taxes. Then for money you don’t need for 3-5 years or longer that you want to keep out of the stock market, I think bonds are great place to consider because they are now offering the most attractive potential returns they have in well over a decade.
Alison Southwick: Well, that doesn’t sound so boring after all.
Robert Brokamp: Glad you think so, Allison.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alison Southwick has positions in Amazon.com and Apple. Bill Mann has positions in Alphabet. Chris Hill has positions in Alphabet, Amazon.com, and Apple. Robert Brokamp, CFP(R) has positions in Vanguard Bond Index Funds-Vanguard Total Bond Market ETF. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Moody’s, and Vanguard Bond Index Funds-Vanguard Total Bond Market ETF. The Motley Fool recommends Simon Property Group and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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