Bichon Frise wrote:
I think since it is such a small part of the portfolio, does it really matter what you do? If want to be in equities, be in equities. If you don't like paying taxes as ordinary income, make a change. If it truly is a small part of your portfolio, it really won't matter in the long run. I could handle the 6.875% pre-tax return and would just let it ride if I felt default risk is low. But, it's your money, so you get to decide what to do.
Yeah. I generally agree with what you are saying. But for discussion purposes...
It really matters what these are. If we are talking about the 100 year Norfolk Southern bonds then I'd note a couple of things:
1. At least in theory, stock valuation is based on the assumption that all companies eventually go bankrupt and hence have zero final value. All valuation is based on the return (dividends paid) to investors prior to that eventuality. Those dividends are uncertain and depend on the company's ability to earn a profit. (Or alternatively, under the "greater fool" theory, the value is what an investor can get an even greater fool investor to pay later).
2. Bond valuation is based on the discounted value of the coupon payments. But the ability to actually pay those coupons depends on the company's ability to earn a profit.
This means that the underlying risk of either a very long term bond or an equity investment are based on the same fundamental variable - corporate profitability. There fore, those bonds should behave like equities. That's in fact what history shows! (For shorter term bonds, even out to a decade or two, there is additional value in the claim on assets and the visibility of profits.)
The point is, I'm not sure I'd treat these as bonds. I think I'd consider them equities in terms of risk, much like a preferred stock without some of the features. I might also view them like a utility stock. Major railroads face no real long term threat in terms of hauling freight so I don't see them going away. Individual companies might run into trouble but the value of their track is pretty sound. They are much like a utility with a monopoly in a certain area.