How to Profit from High Interest Dividend Paying Corporate Bond ETFs

Receiving dividends from investments is a good way to grow your wealth.

Corporate bonds are loans to companies. The company borrows your money for a certain number of years, and in return it pays you interest on the money it borrowed. At the end of the set term of the bond, the company repays the original value of the loan.

In general, larger more stable companies pay a lower rate of interest than more recently set up businesses, or those with risky business models or high levels of debt.

Corporate bonds are a great way of earning interest. The greatest danger is that the company may go bust, so it could end up suspending the interest payments, or in the worst case scenario it may end up not being able to repay the loan. The crumb of comfort is that should this happen then holders of a company's bonds are usually high up in the line of creditors (ahead of shareholders), so the bondholder will usually get something back after a corporate bankrupcy.

Corporate bonds are traded by large corporate investors. Corporate bonds therefore have a capital value that reflects the level of interest as well as the chance that the issuing company will default on its borrowings.

Corporate bonds are generally a good investment in times of deflation. Since they pay normally pay a fixed level of interest, this payment will become more valuable if interest rates and prices are falling. The reverse is also true - if interest rates and/or inflation is rising then the interest received from a corporate bond may mean that the investment is actually losing money.

The prices of corporate bonds will also be affected by general economic conditions. While interest rates generally fall in times of recession, it may also be expected that the chance of a company defaulting on its borrowings will rise.

While it is possible to buy individual corporate bonds, in order to spread risk it is possible to buy an ETF containing a number of different bonds from a variety of different companies.

The most popular UK based corporate bond ETF is the iShares GBP Corporate Bond ETF (London Stock Exchange ticker SLXX). This holds 50+ corporate bonds of companies in sectors ranging from banking to utilities, telecommunications and energy. It tends to hold corporate bonds issued by larger organsiations such as Barclays, Tesco, GlaxoSmithKline and Wal-Mart. The ETF has a very low charge of 0.2% (note that some fund supermarkets and discount brokers may make additional annual charges for holding stocks). Dividends are paid quarterly.

Alternatively, there is the iShares Euro Corporate Bond ETF (ticker symbol IBCX). As the name suggests this fund contains holdings of corporate bonds demoninated in the Euro single currency.

There is also an iShares US dollar corporate bond ETF, (ticker symbol LQDE). This holds bonds from large US based companies such as Dow Chemical, Wal-Mart and JP Morgan.

Corporate bond ETFs may be held in share dealing accounts, ISAs and SIPPs such as those provided by the discount broker Hargreaves Landsdowne. These discount brokerages also have a wide range of other dividend funds available for you to invest it.

If you don't like the idea of lending your money to big business, then why not lend it to people using this social lending website. Finally, here's more information about high income bonds and other great income generating investment opportunities.

The author of this article is not authorised by the UK authorities to give financial advice. This article does not consitute financial advice. Before making investment decisions consult an independent financial advisor.