Individual Bonds Benefit From Elevated Yields and Spreads

by Doug Drabik of Raymond James, 4/2/26

Total return is the entire amount of income passed to an investor holding a particular security. It annualizes any price change plus any dividends or interest earned over time. By example, an investor paying $100 for a stock, earning $3/yr in annual dividend, and selling the stock for $110 two years later has an annual total return of 8% [($110 - $100) +$3div + $3div) / $100 = 16% / 2 yrs holding period]. For many bond investors who hold to maturity, the total return can be calculated upfront. The acquisition yield determines the annual return, factoring in coupon payments and price movement towards par at maturity. The distinction is important because a bond held to maturity essentially removes market price risk from the equation, making it a less risky asset.

S&P 500 index

Taking more risk can be both rewarding and costly. Over six of the last seven years, stocks have performed well by providing investors with double-digit returns. The chart shows that, historically, dividend income has underperformed corporate yields. It is rare for dividend income to outperform the average 10-year corporate yields. It is safe to assume that investors seek most of the total return in equities via price appreciation. The robust stock market has enabled many investors to accumulate wealth. Individual bonds may provide investors with a means to lock in a portion of their wealth into less-risky assets at a known return.

Corporate bonds trade at a spread to Treasury bond rates. If the 10-year Treasury is 4.2% and a corporate bond is at a +50-basis-point spread, then the corporate bond yield is 4.7%. The reason a corporate bond trades with a spread has much to do with real and/or perceived credit risk. The U.S. government is considered more likely to pay its debt. The greater the credit risk, typically the greater the spread or offered yield of a security.