The Lower-Risk Way to Reap Rich Rewards

If you think that you have to invest in stocks in order to make money in the financial markets, think again. Right now, you can find some excellent opportunities to capture extraordinary returns without buying a single share of stock.

That sentiment runs contrary to what you'd ordinarily expect from an investment. Typically, equities give investors the best chance for big gains. Meanwhile, most investors see other types of investments, such as bonds, as being safer but not offering the same chance for profits.

With the current economic contraction accelerating and threatening to become a global depression, though, some of those old rules of thumb no longer apply. Depending on which companies you're looking at, corporate bonds are beginning to look a lot more like stocks, both for current income as well as the potential for capital appreciation.

A look at the bond market
The reason you don't expect to see very high returns from bonds is that they're higher up in a company's capital structure. While shareholders are last in line and can't expect to get any of their money back if a company goes bankrupt, bondholders have at least a chance of recouping some of their investment in case of failure. That lower risk usually translates into lower return, as bond investors bid up prices to reflect their relative safety compared to stocks.

But if you look at bond quotes now, you'll see that even some well-known companies offer yields that are almost as high as the long-term returns you'd expect to see from equities. Here are just a few:

Source: Wall Street Journal.

With those extraordinary yields even for investment-grade companies, you can get stock-like returns without having to count on growth from the underlying business. As long as the company stays in business long enough to pay you back, you'll keep earning those high yields year after year.

Price rises
But while great yields are attractive, what stock investors prefer is the chance to make some real money when share prices rise. Yet right now, many bonds are offering investors that same chance.

Typically, bonds trade close to their par value, generally quoted as a price of 100. Yet you can find many companies trading well under their par value. Here's a sample:

Source: Wall Street Journal. Par value is 100.

If those companies survive to maturity, investors will get a full 100 cents on the dollar. So Ford bondholders could see well over a 400% capital gain from their investment -- if Ford doesn't go bankrupt before 2031.

Of course, that's a huge if. MGM Mirage just yesterday said that it may have to default on its bonds soon. Ford, obviously, faces the same types of concerns. But it's the same risk that shareholders are facing today.

Not for the meek
So don't get the idea that investing in corporate bonds is a low-risk investment. It may be somewhat safer than holding stock in those companies, but with a high risk of business failure, there's plenty of risk in bonds as well.

In addition, buying and selling bonds is a lot harder than trading stocks. While you can almost always find someone to sell you shares, buying exactly the bond you want at a good price is never a sure thing. Many brokers will let you buy bonds, but getting reliable quotes and good information challenges even sophisticated investors.

But if you feel that investing in stocks is like throwing your money away right now, take a closer look at corporate bonds. They don't have the same level of safety you might associate with most bond investments -- but if things work out well for the economy, the returns could make you quite pleased.

For more on earning good returns on income-paying investments, read about:

• The stock that's screaming "buy me!"
• Are your stock dividends going to disappear?
• Has Warren Buffett been wrong all along?