An Easier Way to Buy Bonds

Buying individual corporate bonds can be a good strategy, but it’s a hassle for most small investors. You must buy them in large increments, typically $1,000 to $10,000. They can be hard to sell before maturity. And it’s hard to tell just how large a commission your broker is taking.

Little-known alternative: Corporate “baby bonds.”

How they work: So-called baby bonds typically are issued in $25 increments by companies such as utilities, manufacturers and financial firms. They trade like stocks, mostly on the New York Stock Exchange. They pay higher yields than comparable traditional corporate bonds because in the event of default by the issuer, baby-bond holders are paid after traditional-bond holders. Also, baby bonds usually are “callable” five years after issuance, meaning that they can be redeemed by the issuer before maturity. In that case, investors don’t earn the yield for as long as they expected. But that is not much of a risk in the current rising-rate environment. The IRS treats distributions from baby bonds as interest income rather than dividends, which can mean a higher tax rate, so you may want to keep them in a tax-advantaged ­account such as an IRA.

You can see currently available baby bonds at DividendInvestor.com/exchanged-traded-debt-issues-yield.

Two baby bonds I like currently…

Entergy Louisiana First Mortgage Bonds (ELJ) are issued by the largest public utility in Louisiana, carry an A- (medium-investment-grade) rating, yield 5.25%, are currently callable and mature in 2052.

Stanley Black & Decker Junior Subordinated Debentures (SWJ) are rated BBB+ (low-investment-grade), yield 5.75%, are currently callable and mature in 2052.