Common Stock and Fixed Income Investments

Much of the investment universe may be further subdivided into common stock and fixed income galaxies. Common stock and fixed income securities offer distinct risk versus reward profiles due to their respective positions within corporate finance. Evaluate the characteristics of each asset class before building a diversified portfolio that remains in line with your life goals and investment objectives. All financial moves do introduce particular risks. 

Fixed Income

Fixed income securities, such as bonds and preferred shares, offer level interest and dividend payouts through a set time frame. Money market investments are credit securities that mature within less than one year.

Retirees who live on a fixed income expect level social security and pension payments for one year, before monthly payments are adjusted higher alongside inflation (COLA). Individual pension payments are typically drawn down from larger asset pools of bonds and insurance policies.

Alternatively, common shares do not pay guaranteed dividends. Financial managers set dividend policy according to corporate profits and growth projections. A smaller technology company is not likely to pay dividends, so that cash flow may be reinvested back into the business for growth.

Mature businesses, like Coca-Cola and Exxon Mobil are most likely to return capital back to investors through steady dividend increases and share buy backs. We divide annual dividends by current share price to calculate dividend yield.  

Convertible bonds, convertible preferred shares, and participating preferred shares are hybrid securities, which do enable conservative savers to benefit somewhat from the profitability of the underlying firm. Fixed assets convertible into additional shares of common stock does expose current shareholders to dilution, or lesser ownership percentages.  

Corporate Finance

Corporations issue bonds, preferred shares, and common stock to raise financing. Bonds are credit securities, which means that corporations are legally obligated to pay out interest, before returning capital back to owners, or shareholders. Next, in turn, preferred shares are senior to common shares. Preferred dividends are cumulative and must be paid before any common stock dividends are paid out.

Corporations pay out dividends at their own discretion. Alternatively, corporations go into default and may ultimately file bankruptcy due to missed interest payments. Corporations must then liquidate, or sell off assets, to pay off bondholders, first. Shareholders are last in line, and relegated to accept pennies on the dollar, out of whatever spare cash remains.  

Risks Versus Returns

Bonds and preferred shares are relatively safe investments due to their senior asset claims. Here, investors must be willing to accept minimal growth, in exchange for safety of principal. Fixed income, of course, is highly susceptible to inflationary risks. Domestic inflation averages 3% annually, according to the Bureau of Labor Statistics Consumer Price Index (CPI). 

Fixed assets are also susceptible to interest rate risk. Higher rates devalue fixed assets already in circulation, because newly minted credit securities will then pay out more interest income. 

Shareholders are owners; and returns are highly correlated with corporate profits. Share prices may swing wildly between zero and infinity through regular business cycles. Diversified portfolios preserve principal, while still offering growth potential.

Onyx Investments recommends a gradual shift out of equites and into more fixed assets over time, as you approach retirement.