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The Best Fixed-Rate Bonds to Buy Now

Term preferred stocks and baby bonds offer some of the best fixed-rate bonds to buy on today’s market. And right now, four of them stand out.

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If we’ve heard it once, we’ve heard it from hundreds of subscribers: What are the best fixed-rate bonds to buy? Ever since late 2008, income investors have been in a pickle—after a few rate hikes, the Fed is back at 0% and most money market funds are yielding zilch, forcing investors to dive into dividend stocks to earn their 3% or 4% yields.

I have nothing against dividend stocks, of course – and nor should you. In fact, I highly recommend subscribing to our Cabot Dividend Investor advisory, which focuses on finding the best dividend-paying stocks, whether it’s high yield, safe income or dividend growth stocks—achieving both solid income and capital gains. (Click HERE for more information.)

But many investors are also looking for some surety through fixed-rate bonds—getting 4% to 7% interest every year (sometimes more) with a lot of safety is especially attractive when longer-term government bonds are yielding 1%. In a low-interest rate environment, most investors don’t believe such safe, steady gains are possible.

But they are! And it’s not achieved through a complex system of options or speculative instruments that you have no confidence in.


Today, we focus on three plentiful, popular types of fixed-income securities: Term preferred stocks, “baby” bonds (they’re called baby because they’re issued in $25 increments so the average investor can buy them) and fixed-to-floating preferred stocks. As with any investment, you have to know what to look for, but once you do, you can achieve the steady and safe income steam you desire.

The Best Fixed-Rate Bonds: Term Preferred Stocks and Baby Bonds

Term preferred stocks and baby bonds are very similar in how they work. Let’s talk about some of the details.

Pricing: The vast majority of term preferreds and baby bonds have a par value of $25 per share. They trade on major exchanges and are bought just like stocks through your brokerage account.

Liquidity: Nearly all preferreds and baby bonds trade somewhat sparsely. Thus, when buying, you want to be sure to use limit orders—if you buy at the market, you’ll often pay more than you have to. Instead, place a limit order for the day; that way you know you won’t pay more than a given price.

Callable: Almost all preferreds and baby bonds are callable two to five years after their initial issuance. What does that mean? That the company has the right to “call” back the security, paying owners $25 per share in exchange. (Companies will do this occasionally to “refinance” the bond and cut their costs.) Because of this, you want to avoid buying issues that are (a) priced well above $25 and (b) could be called within just a few months.

Fixed Coupons: Every preferred or baby bond has a fixed coupon rate. Most pay interest quarterly, though some term preferreds pay monthly. Of course, the big benefit is that these payouts are higher up the food chain for a company—they have to pay your interest before any common dividends. So the payments are much more dependable than a regular stock dividend.

Maturity: Every term preferred and baby bond has a maturity date, at which point the company gives you back $25 per share. Some bonds from well-respected companies have very long maturity dates—up to 60 years if you can believe it!—but there are a good number that mature in three to 10 years.

Note: Ordinary preferred stocks (often called perpetual preferreds) have similar features, but of course, they have no maturity dates. Companies never have to redeem them! That’s fine as long as interest rates are steady, but when rates rise, there’s nothing stopping these perpetual preferreds from falling sharply in value and staying down for years.

Additional Safety Features: Some of the most common issuers of term preferreds and fixed-rate baby bonds are closed-end funds and business development companies (BDCs), which offer these securities to leverage their results for common shareholders. The good news for income investors is that both have asset restrictions that make it safer to own these securities.

Specifically, BDCs are required to have an asset coverage ratio of at least 150% – generally speaking that means for every $1.5 million of assets, they can’t have more than $1.0 million in liabilities. (There are a couple of exceptions, but those are easily checked before you buy the bond.)

Moreover, closed-end funds have even greater protections—they must have an asset coverage ratio of 200% (twice as many assets as total liabilities), and when they issue debt, the coverage ratio must be 300%! Such restrictions give the fixed-rate bond investor a huge cushion of safety.

Adding a Little Flavor (and Higher Yield): Fixed-to-Floating Preferred Stocks

Fixed-to-floating preferred stocks are a special instrument that have been gaining in popularity recently. Like ordinary preferred stocks, they have no maturity, but their special floating rate feature protects them from future rises in interest rates.

Specifically, fixed-to-floating preferred stocks pay a fixed amount for the first few years of their life, but after that, will pay a floating rate (normally three-month LIBOR, which goes up and down with the Fed’s actions, plus a fixed portion). Thus, if rates stay low, you’ll get a reasonable payment, but if they rise in the years ahead, these issues will tend to hold their value, as investors know the payments will increase along with interest rates.

The 4 Best Fixed-Rate Bonds Right Now

So what term preferreds, fixed-rated baby bonds and fixed-to-floating preferreds are our favorites? Here are four to consider, but a word to the wise—nothing is risk free, including these securities. (If it was, you’d be getting 1.0% interest, like you do in a money market fund.) It’s always possible things could go amiss, so be sure to do your due diligence before buying.

With that said, here are the four best fixed-rate bonds right now.

Best Fixed-Rate Bond #1: Eagle Point Credit Baby Bond (ECCW)

Coupon: 6.75% ($0.422 per share, per quarter)

Interest Payable: Last day of March, June, September and December

(Note: Ex-dividend dates are usually two weeks before the pay dates)

Payments will count as ordinary income (fully taxable)

Callable as of: 3/29/2024

Maturity Date: 3/31/2031

Eagle Point is a closed-end fund that invests in collateralized loan obligations (CLOs). Please note that these are not the collateralized debt obligations (CDOs) that nearly brought down many big banks during the financial crisis.

CLOs have a long history of volatile-yet-juicy returns. CLOs own a collection of senior, secured, floating rate corporate bank loans, albeit with lots of leverage. Thus, Eagle Point itself is almost like a juiced up high-yield bond fund. Indeed, when high-yield bonds were under duress during the 2015-2016 energy price collapse, this fund’s net asset value fell from $19.63 per share in November 2014 to as low as $13.02 per share in March 2016, a 34% haircut. And the fund saw its value per share fall more than 40% during the first half of last year (pandemic), though it’s since recovered a big chunk of that

However, as investors in the fund’s baby bond, that action doesn’t mean much. What really counts is the fund’s asset coverage ratio and the cash its investments spin off.

As mentioned above, for closed-end funds, total assets must be at least two times the total leverage (debt plus preferred stock) on the books. And for a baby bond like ECCW, the coverage must be three-to-one! Eagle Point is even more conservative on that front (a good thing); the funds’ assets total about $558 million, compared to $138 million of fixed-rate bonds (asset coverage of around four-to-one), which provides a huge level of cushion for investors in the baby bond. (Eagle Point also has another $47 million or so of term preferred stock—another form of leverage—but ECCW is higher up on the food chain than the preferreds.)

As for income, there’s also a giant amount of safety for ECCW. Last year, the fund brought in $63.5 million of investment income, but the annual payments on its baby bonds (including ECCW) will be just $9.3 million—nearly 7-to-1 coverage! Even the horrible early-2020 credit crunch did nothing to threaten the viability of these baby bonds.

Finally, the company has no debt or preferred maturities until 2026—so there’s no chance of a “forced refinancing” (which can occasionally cause issues) for many years.

ECCW has a slightly longer time until maturity (2031) than we’d prefer, but it’s a relatively new issue so it’s not callable (at 25 per share) until 2024. There will be ups and downs with the fund itself (especially if junk bonds get hit), but this bond should be very safe and steady, paying out a solid rate of interest for many years to come.

Best Fixed-Rate Bond #2: Energy Transfer Partners Series E Fixed-to-Floating Preferred Shares (ET-E or ETPprE at most brokerages)

Coupon: 7.60% ($0.475 per share, per quarter) through 5/15/2024; then paying 5.16% plus three-month LIBOR

Dividends Payable: 15th of February, May, August and November

(Note: Ex-dividend dates are usually two weeks before the pay dates)

Security will produce a K-1 at tax time (it’s a simplified version, though, with payments generally equal to taxable income)

Callable as of: 5/15/2024

Maturity Date: None

Energy Transfer Partners is a giant master limited partnership, with assets totaling $96 billion that are spread all around the country and have a presence in most of the country’s major basins, including the Permian, Bakken, Marcellus, Eagle Ford and more. It’s even going on the offense a bit here, as it’s in the process of acquiring Enable Midstream.

The common stock of Energy Transfer has had a tough time in recent years, though like many of its peers, it’s begun to come to life a bit. For a long time, investors worried about the debt load (even though that’s come down quite a bit) and energy prices. But business has been solid for years, even through 2020’s pandemic—adjusted EBITDA totaled $10.5 billion last year while distributable cash flow came in at $7.7 billion.

Interestingly, the company actually halved its common dividend in recent months, but that’s going to be a good thing for this preferred stock, as the extra cash flow (about $1.2 billion per quarter) will go to debt reduction. There also aren’t any major debt maturities this year, so a credit crunch (which we don’t expect anyway) won’t hurt the firm’s ability to run its ship. Moreover, so-called “growth capital spending” (expansion spending) is way down this year and will fall further going ahead, with the firm’s primary focus on reducing leverage.

That’s music to the ears of preferred holders—the more cushion it has, the more stable the outlook for the preferred stock will be. Indeed, annual preferred payments and interest expense are something like $390 million, with after-CapEx (and interest) cash flow likely coming in somewhere in the $5.5 to $6.5 billion range. That’s an enormous amount of cushion, especially considering the firm is spending billions to pay down debt.

ETP-E is a fixed-to-floating issue, paying a solid 7.60% annually through May 2024. After that, the preferred will then pay 5.16% plus three-month LIBOR (trading around 0.2%), so it’s possible the payout could see a haircut. But that’s three years away, and it certainly seems like the Fed is going to be hiking rates (which will hike Libor) going ahead. We think ET-E is a great investment for at least a couple of years and then we’ll see what the interest rate environment looks like then.

Best Fixed-Rate Bond #3: Newtek Business Services 5.50% Baby Bond (NEWTZ at most brokerages)

Coupon: 5.50% fixed annually ($0.343 per share, per quarter)

Dividends Payable: First day of February, May, August and November

(Note: Ex-dividend dates are usually two weeks before the pay dates)

Qualified Dividends: No (fully taxable)

Callable as of: 2/1/2022

Maturity Date: 2/1/2026

Okay, okay, 5.50% isn’t the most thrilling thing in the world, but we’re putting this bond in here because it’s very short-term (matures in less than five years) and looks safe. Nothing wrong with that combination.

Newtek Business Services (common stock ticker is NEWT) is technically a business development outfit though it’s not a traditional lender—instead, it’s heavy on providing small business administration loans and was a big funder of PPP loans last year and early this year as part of the government’s rescue packages. (It often will package and sell these loans, too.) The firm also has a few small outfits under its umbrella, such as a payment operation and some technology providers for small businesses. Honestly, it’s a bit of an ice cream headache, but the firm has been public since 2000 and has never skipped a beat.

At the end of 2020, Newtek had around $840 million of assets vs. $504 million of total liabilities, so it’s well in the black in terms of its equity. And for last year as a whole, it brought in $92 million of investment income and fees vs. interest expense (such as those paid by these baby bonds) of less than $18 million—a very healthy five-to-one interest coverage ratio. And, by the way, business is surging, with management upping common dividend forecasts—that doesn’t directly affect the bonds, of course, but it never hurts to be involved with a thriving company.

Just as important is the structure of Newtek’s liabilities—the nearest-term maturity are notes due in 2023, and Newtek hasn’t had any trouble refinancing and extending maturities in recent years as its business ramps.

Lenders can always be a bit tricky to invest in, but with Newtek, there’s plenty of margin of safety in a firm that’s proven itself over the years. We think the relatively new NEWTZ notes will be a solid, steady investment. The one risk is that this new issue is callable early next year—still, unless rates dive further, the chances of a call seem slim as the firm won’t likely get a meaningfully lower rate. (Indeed, Newtek has a higher coupon baby bond that’s callable later this year—that one may be redeemed.) All in all, we think NEWTZ will be a solid, steady investment for the next few years.

Best Fixed-Rate Bond #4: Annaly Capital Series I Fixed-to-Floating Preferred Shares (NLY-I or NLYprI at most brokerages)

Coupon: 6.75% fixed annually ($0.422 per share, per quarter) through 6/30/2024; rate will then float at 4.99% plus three-month LIBOR

Dividends Payable: Last Day of March, June, September and December

(Note: Ex-dividend dates are usually two weeks before the pay dates)

Qualified Dividends: No (fully taxable)

Callable as of: 6/30/2024

Maturity Date: None

We’re not huge fans of mortgage REITs as general businesses—while they pay healthy dividends, even the best firms in the group can see their book values (and common stock prices) decrease when spreads tighten and the occasional pop higher in interest rates damages their investments.

However, for income investors, the preferred stocks of many in the group are very safe. Why? Because the payments from these preferreds are tiny compared to the company as a whole, providing a ton of cushion even when the environment turns bearish. That’s especially true for firms that focus mostly on very liquid agency mortgage securities, giving them the ability to raise cash in an instant.

Annaly Capital is the big dog in the mortgage rate sector ($85 billion in assets!), and its various fixed-to-floating preferred stocks have a ton of coverage, which is why we think it’s a good investment. For instance, Annaly pays out around $27 million or so of preferred dividends every quarter (it has many series of preferreds, but the I is our current favorite), which is not only tiny compared to its overall net asset value ($14 billion) but also pales in comparison to its common stock dividend ($307 million per quarter).

Even comparing the total value of all preferreds (about $1.5 billion), the company could buy them all back (in theory) nine times over, especially as so many of its assets are unencumbered. Throw in the fact that management has navigated many tough environments (it’s been public since 1997), including last year’s, and there’s no reason to think the preferreds won’t pay out nicely for a long time to come.

Similar to Energy Transfer’s preferred mentioned above, Annaly’s Series I doesn’t have a maturity date—but it does have a floating feature that should protect the preferred from falling much if (when) interest rates rise. It will pay out at a 6.75% rate no matter what through June 2024, and after that, the preferred’s payment will be 4.99% plus three-month LIBOR, which tends to move up and down with the Federal Reserve’s action. Right now, LIBOR is just 0.2%, but there’s still three years of 6.75% coupon payments coming no matter what. The preferred stock has popped of late but still looks like a decent buy and should be even better on any weakness.

The Bottom Line

Whether you’re interested in any of these four securities or not, our main point is that term preferreds and fixed-rate baby bonds are a largely unknown area of the market for most investors. From our view, they offer the best fixed-rate bonds for income investors looking for a safer alternative to dividend stocks.

Do you own any fixed-rate bonds or preferred stocks not on this list? Tell us about them in the comments below!


*This post has been updated from an original version that was published in 2016.

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.