With interest rates going the same way as a lead balloon, yield hunters out there are falling over themselves to buy shares in high-yielding shares and other income-producing assets. Some of the most popular assets at the moment are the stocks known as ‘bond proxies’.
A ‘bond proxy’ is a company whose stock has characteristics more reminiscent of a bond than other stocks. With bonds, investors loan an entity (usually a government or corporation) a fixed sum of money for a defined period of time, say five years. During the five years, investors are paid ‘coupons’ or interest payments, and when the five-year span has elapsed, the investors get the original principal back. This is why bonds are also known as ‘fixed-interest’ investments.
With ‘bond proxies’, the stock is deemed so safe that its dividend yields are comparable to that of a bond.
Here are three ASX ‘bond proxy’ stocks that have been going gangbusters over the last few months (and years).
Transurban Group (ASX: TCL)
Transurban is a company that owns and operates toll roads around Australia and North America. As you can imagine, the demand for toll-roads is highly stable and Transurban is able to offer a juicy dividend due to legislated annual toll rises. Investors have been attracted to this type of safe yield and Transurban shares have risen over 97% over the past 5 years – currently yielding 4.04%.
Sydney Airport Holdings Pty Ltd (ASX: SYD)
Sydney Airport holdings runs… (you guessed it) Sydney’s Kingsford Smith Airport. This airport is the only commercial airport in Sydney (for now) and the largest airport in Australia. It is a huge artery in the Australian economy and anyone who wishes to enter or leave NSW by air will probably do so through this gateway. This gives Sydney Airport a huge competitive advantage as well as a highly stable stream of income. SYD shares are up around 87% over the past five years and are currently paying a 4.75% yield.
Rural Funds Group (ASX: RFF)
Rural Funds Group is a REIT (Real Estate Investment Trust) that owns and leases farmland around the country. Farmland is an evergreen asset that hasn’t gone out of demand since our cavemen/cavewomen days and Rural Funds owns quite a lot of it. Among the products produced on RFF farms are nuts, cattle, cotton and grapes. Rural Funds has only been public since 2014, but its share price has risen by over 220% since that time. RFF is currently yielding a 4.24% dividend.
I expect that the demand for bond proxies will remain high as long as actual bonds are paying historically low rates. All of these companies offer highly stable, all-weather yields and investors are showing that they are willing to pay a very high price for it.
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Returns As of 6th October 2020
Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED, Sydney Airport Holdings Limited, and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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