“Borrowing Binge Reaches Riskiest Companies” read a headline to an article in The Wall Street Journal. Citing data from Leveraged Commentary & Data (LCD, a unit of S&P Global Market Intelligence), the paper reported that a record $139 billion of below-investment-grade debt was issued from the start of the year through February 10. Approximately 10% of those bonds were rated triple-C or lower.

The triple-C or lower-rated bonds are among the junkiest of the junk bonds. Bond ratings of CCC (S&P, Fitch and KBRA) or Caa (Moody’s) are assigned by the rating agencies when the issuer is judged to be highly vulnerable to not meeting their obligations to bondholders. Ratings below these levels—Ca/CC, C or D—imply either that default is imminent, the issuer has defaulted or a bankruptcy petition has been filed.

Issuers on riskier grounds are rushing to get their bonds out because relative yields are low. Bonds tracked by the ICE BofA U.S High Yield Index had an average yield of 3.97% as of February 12, 2021. Investors are buying these bonds or funds that hold them because the yields of less-risky bonds are lower.

Not all high-yield bonds are at the high end of the risk spectrum. Non-investment-grade ratings Ba/BB and B are assigned when there is a possibility of the issuer encountering problems in the future. An example would be a cyclical company in a highly competitive industry with lots of debt on its balance sheet. Should an economic or industry downturn occur, it would be under greater financial stress but not necessarily default on its obligations to bondholders.

An elevated level of risk exists for such issuers, but default is generally not lurking around the corner. Still, there is a reason why the word “speculative” is used to define such bonds.

Investors who use bonds or bond funds to offset the volatility of stocks and/or to provide income will find safer ground within the investment grade category. These are bonds whose ratings are Baa/BBB or better. Such issuers are financially stronger and better able to withstand downturns. Could an investment-grade-rated issuer default? It’s possible, but not common. The more likely event is a series of downgrades by the rating agencies as the risk of default rises.

Though a helpful gauge, bond ratings are not as intuitive as the buy-hold-sell ratings issued for stocks. To help you make sense of them, I asked long-time AAII Journal contributors Hildy and Stan Richeslon to provide a comparison of them. They give both an explanation as well as context by which to understand them. You’ll find their article, along with a table comparing the rating scales from the four rating agencies, here.

Bonds aren’t the only source of portfolio income, of course. Many of you hold dividend-paying stocks. The preeminent index of such stocks is the S&P Dividend Aristocrats Index. To qualify for inclusion, a company must be in the S&P 500 index and have raised its dividend for at least 25 consecutive years. It’s an exclusive group. As of January 29, 2021, the index had only 65 constituents.

Long term, the index has impressive performance. During the past 10 years, less so. Contributing editor Brian Haughey takes a closer look at the index, including its underperformance over the past decade, here.

Income investing is the topic of one of the initial online special interest groups we’re building into our community initiative. This initiative will expand the ability of AAII members, like yourself, to interact with other members. For many years, we’ve offered members the benefit of having local chapters. Though they’ve had to switch to webinars instead of hosting in-person events because of the coronavirus pandemic, our local chapters are continuing to actively hold meetings. To find a chapter and see a list of upcoming meetings, go to www.aaii.com/chapters.

We’re now expanding upon the concept of facilitating member interaction. Our online groups will facilitate communication between members regardless of where they live. We’ve started this by using existing social media platforms as we work to add a new forum to AAII.com. If you’re comfortable using Facebook, you can find us by simply typing “AAII” into the search box. Once you are on our page, click on “More” and then “Groups.” There, you will find our income investing, retirement withdrawals, mutual funds/ETFs, allocation strategies and stock screening groups.

Again, this is just the start. We’ll have more to say about our community initiative as the year progresses, as well other enhancements we’re making to AAII.com.

Wishing you prosperity and good health,