Passive Income Sources: Junk Bonds

Passive Income Sources: Junk Bonds

Should I start with a junk in the trunk reference, or point out that the term junk is also a slang word for male genitalia? Decisions, decisions.

As I’ve explained before, y’all gotta get yourself some bonds. They serve a couple of purposes. First, they tend to go up when CRAZY TWEETING PSYCHOPATHS LIKE DONALD TRUMP make stocks crash. SMDH, he’s already ruining America.

Wait. I’m being told that didn’t happen. Well. That’s surprising.

When stocks crash, that’s usually a good buying opportunity. Since most people are fully invested (or at least should be, since opportunity costs are a very real thing), they don’t have a ready cash source available when it’s time to start buying. That’s where bonds come in. You sell them and buy equities.

There’s just one problem with bonds today. They don’t offer much in yield. Canada’s biggest bond ETF (the iShares bond universe index fund, ticker TSX:XBB) pays less than 3% annually. That’s not bad when compared to a GIC, but it’s not very exciting. I NEED A RUSH BABY YOU GUYS GOT ANY METH?

There are other bond sources that pay much higher yields. Let’s take a closer look at junk bonds, the perfect thing to sexy up your fixed income portfolio.

What are junk bonds?

Junk bonds sound bad, Nelson. Real bad. I don’t care for things that are bad.

Thanks for helping out, Italics Man.

Junk bonds (or high-yield bonds if you’re being paid by someone who peddles such things) are debt instruments issued by riskier companies. The bond risk hierarchy goes something like this:

  • Governments
  • Mortgages and other things backed by the government
  • Provincial/State governments
  • High-quality corporate debt
  • Medium-quality corporate debt
  • Countries ran by dictators or Greece
  • Terrible corporations
  • Your friend Steve

When interest rates were higher, the spreads between the best risks and the worst risks was in the neighborhood of 5-20%. That spread has tightened somewhat. A government can get short-term money for 1%. Most junk bonds don’t pay any higher than 8%.

Junk bonds don’t really behave like regular bonds. Most bonds go up and down based on two factors — interest rates and the direction of stocks. Often these two things go hand in hand. So if stocks fall, that means rates will fall with them. Bonds will then go up. The opposite happens when stocks rise. Junk bonds do follow interest rates, but they also react alongside stocks. They’re much more sensitive to the overall health of the underlying company.

Look at it this way. Microsoft is one of the safest bets in the corporate bond world. It’s going to pay back its debt no matter what. Things are much dicier for a company like Teck Resources. It needs a halfways decent economy.

How to invest in junk bonds?

Let’s focus with the two easy ways, which are through ETFs or closed-end funds. You can also buy individual junk bonds, but if you could do that you’d probably be reading smarter stuff than this crap.

There are a metric assload of junk bond ETFs out there, all with their own unique spin on the world but with only the smallest of differences. Hey, just like personal finance blogs!

Oh, that’s gonna get him punched.

The biggest junk bond ETF is the SPDR Barclays Capital High Yield Bond ETF, which has a very appropriate ticker of JNK on the New York Stock Exchange. It holds 811 different bonds that have an average yield to maturity of around four years. It pays out a dividend of 6.1%.

The junk bond world in Canada is much smaller than in the U.S., so we’re pretty much stuck investing there. But there are quasi-Canadian ETFs that at least trade on the Toronto Stock Exchange. BMO has a U.S. junk bond ETF that’s hedged to Canadian Dollars (TSX:ZHY), that pays 6.1% and has an average of about four years maturity left. But it only holds 463 different bonds like a chump and/or chumpette.

I don’t own any of these ETFs. Instead, I use a closed-end fund to get exposure to the sector. I even pay a management fee of (gasp!!!) greater than 1% to do so.

I own the Dreyfus High Yield Strategies Fund (NYSE:DHF) which uses leverage to enhance junk bond returns. In a nutshell it takes a dollar, borrows an additional thirty cents, and invests the $1.30 in a couple hundred junk bonds. Because it can borrow at good rates, this gooses my yield in exchange for a little more volatility. I’m quite okay with this trade-off.


My Dreyfus closed-end fund yields 9.8% versus 6.1%, which is what a comparable ETF pays. If we’re looking for income, that’s good.

I’ve held that fund for close to a decade now. It has cut the payout a few times, but only because bond rates went down. Individually, junk bonds are risky. A group of two hundred of them aren’t. The risk is in interest rates, not so much with companies not paying.

If you’re interested in the whole leveraged bond market, there are dozens of such closed-end funds out there. I should really do a blog post on some of them.

Should you do it?

Yes, you should add junk bonds to your portfolio. They’re volatile, but they are also a pretty outstanding income source.

In the decade I’ve owned the asset class, I’ve basically broke even on the price of my fund and collected a dividend of approximately 10%. I’d call that a decent result.

There are just a couple of things to remember. First, consider them equities rather than bonds. They won’t be an ocean of tranquility when markets are falling. And don’t freak out about price movements. I’ve always considered the asset class a cash flow game. It’s the perfect investment to tuck away and forget about for a while, especially if you own it in a fund.

Covered Calls: A Good Way To Generate Income…But There’s A Catch

Covered Calls: A Good Way To Generate Income…But There’s A Catch

We all like the dividends, right?


That reaction is a little over the top, but hey. It’s probably pretty accurate.

I’ve came out before in my opposition of dividends. I used to think people who insisted on every stock they own paying a dividend were uninformed and setting themselves up to accept lower returns going forward. After all, dividend-paying stocks sure have been helped by a 30-year decline in interest rates. Thousands of retirees have abandoned GICs and government bonds, searching for the yield they need to survive in this pension less world.

But I’ve softened my stance over the last little while. It’s actually gotten to the point where I prefer to invest in companies that pay a dividend. I like getting paid to wait for whatever stupid little value stock I own to recover. I then reallocate that capital into other investments, creating my own compounding machine in the process.

Thanks to low interest rates and our terrible savings rates, stocks that yield between 5-10% are more popular than eating bacon while watching some show about zombies. Isn’t that what you kids do? I dunno.

But there’s a problem with these kinds of companies. Big yields tend to equal big risks. Sure, you can analyze the financials to see whether the company can afford the payout, but that’s hardly a foolproof method. Earnings aren’t guaranteed, neither are dividends. Management can and will cut payouts.

So you have a problem. You need a lot of yield from a portfolio, but you don’t want to take huge risks to get it done. What’s an investor to do besides wet themselves with fear?

Well, there are several strategies. Let’s look closer at using covered calls to get enough income to finally get the ladies at the retirement home to notice you.

What are covered calls?

Great question, guy who just asked that. Give yourself a raise.

Before you read this, go ahead and verse yourself on the basics of option market. Or not. Whatever, it’s a free country.

Covered calls work a little something like this. A call option gives you the right to buy a certain stock at a certain price on a certain day. If you straight up buy calls, you’re essentially making a bet that the underlying stock goes up in value.

You can also sell a call, which means you collect the premium up front in exchange for locking in a certain selling point of the underlying security. This is a dangerous thing to do unless you own said security.

If you do own the security, you’re writing what’s called a covered call. I promise, this will make more sense once I show you a specific example.

Okay, say you owned 100 shares of Telus, a stock currently trading for $40.25. The $42, May 20th call option currently trades hands at $0.22 per share. What you’d do is you’d enter into a transaction to sell the call option, collecting $22 today in exchange for agreeing to sell your Telus shares at $4,200 on May 20th.

Still with me? Good. Okay, one of two things can happen. Telus shares can end the next month at less than $42 or more than $42.

If Telus shares end up below $42, this is a good trade to make. You’ll collect your $0.22 per share premium with no consequences. FREE MONEY BABY. If you repeat that trade over and over again each month or each quarter (some shares have monthly options, but most don’t), it’s easy to see how you can really goose your dividends. Add the call premiums to Telus’s already generous dividend and you get a total yield of approximately 10%.

The issue with a covered call strategy is when shares go up. If Telus closes at $42.01 on May 20th, you’re forced to sell your shares for $42. This isn’t so bad on the surface, since you’ve still made a gain of $1.75 per share plus the $0.22 per share option premium you collected at the beginning. Not a bad profit for a month, right?

But what happens if me and all my rich friends decide we’re going to acquire Telus at $50 per share? This offer would send shares soaring, leaving you kicking yourself for agreeing to sell at $42. You’d be missing out on a lot of excess return.

This is precisely why a covered call strategy is more popular for big, mature, boring blue chip stocks like Telus. Shares of such companies don’t tend to move that much.

That’s covered calls in a nutshell. Essentially you’re exchanging income now for potential capital appreciation in the future.

The easier strategy

Those last paragraphs were kinda complicated, right? I bet you didn’t even read them. You did? LIAR. DON’T LIE TO ME I CAN SMELL LIES.

So instead of doing the hours of work it would take to implement your own covered calls strategy, just take the lazy way out. Pay some guy to do it for you.

There are plenty of options. The first is a closed end fund ran by former Dragon’s Den star Brett Wilson’s company, Canoe Financial, called the Canoe EIT Income Fund (TSX:EIT.UN). Shares of this closed end fund trade at $10.49 each and it pays a monthly dividend of $0.10 per month. That’s good enough for a yield of 11.4%.

There’s one simple reason why I like this fund, and it’s not because of the management fee, which is north of 1%. It’s because the net asset value of it is currently $12.32 per share, meaning you’re buying shares of really easy to value companies at a discount of about 20%. Each year, the fund gives unit holders the right to redeem shares at 95% of NAV. The offer is always oversubscribed, but on average, about 20% of units tendered get redeemed. It’s a nice capital gains perk for a product that’s just supposed to be about the income.

BMO has at least two covered call ETFs, the Canadian banks covered call ETF (TSX:ZWB) and the covered call utilities ETF (TSX:ZWU). The utilities ETF yields close to 7%, while the bank ETF is closer to a 5.5% yield, something that’s not very interesting considering the banks themselves yield about 4%. Both beat the Canoe product in management fees (coming in at 0.65%), but lose big time in yield. Since these are income-first products, yield matters. A lot.

All of these products have cut their income over the last five years as more and more people use the options market in an attempt to generate income. So don’t go thinking that a covered call strategy is something you can count on. It has the same sorts of risks inherent with other forms of investing.

Is It Possible To Make Money Gambling?

"I call him Gamblor!"

“I call him Gamblor!”

There are hundreds of different side hustles you could possibly do. You could sell your bodily fluids, some sexier than others. You could walk dogs or babysit larger, less smelly, more human dogs. You could even take pictures of your used underpants and sell them on the Reddit, a thing that actually exists.

Man, capitalism will never cease to amaze me.

For a while, during the Saturday/Sunday/Friday/Monday morning dumps, I was doing a gambling category. I’d pick three games to bet on, keeping track of my record. I eventually got it back to a little over .500 after spending the better part of a year in the hole. Luckily for me, I never placed an actual dollar on any of those games.

But just because I am a terrible gambler doesn’t mean you can’t make money gambling. Here are a handful of ways you could potentially make a little extra cash doing it, with their chances of success.


Back in the early days of this here blogening, I took a look at doing this using a computer program. Back then the programs were more basic than they are now, but many actually came with evidence that they’d be consistently profitable players at the lowest stakes, i.e. where the shitty players hang out.

The only problem is the poker websites hate poker bots. If you’re caught using one, your ass is gone than me finding an episode of Sex and the City.

So you’re probably going to want to play the old fashioned way. Poker isn’t nearly as popular as a few years ago, which means a lot of the crappy players have moved onto daily fantasy sports, or some other such nonsense. This is making it more difficult for average or maybe slightly above average players to make consistent money.

I know a couple of guys during my days as a casual player who make a decent amount of income playing poker. I also know more who downright suck at it, and shouldn’t even be trying.

Your chances of success: moderate


If you play blackjack properly, the casino’s edge falls to practically nothing. Assuming, of course, the casino gives you rules that aren’t terrible.

In a relatively standard game (one that lets you split aces, double down on any two cards, and pays 3-2 blackjack), the house’s edge is about 0.4%. Which means the house will win 50.4% of the time, while you’re winning 49.6%.

You can push this edge slightly into your favor by counting cards and betting more aggressively when the odds are in your favor. You can’t go nuts doing this, or the casino is going to kick your ass out. If you’re betting $5 at a time, going up to $500 is a no-no. But you could probably get away with $25.

But even if you’re playing optimally, Blackjack is still a losing proposition over time.

Your chances of success: low

Sports betting

If I were to try make money gambling, I’d probably try doing it with sports betting.

You have to be smart with it, unlike when I dabbled in the art. It involves doing a ton of research and being very selective in what games you happen to choose.

I’ll give you one system that has worked out pretty well. From 2000 until 2013, there were a total of 67 NFL games where the home team was a double digit underdog. Think of situations like the Packers going into Detroit back when the Lions were terrible. The home team only had a record of 26-41 in those games, but they covered the spread 82% of the time.

Depending on how generous your bookie is, you’ll have to hit between 52.5% and 55% of your games right to make any money betting on sports. But if you’re very selective on games you want to get on, I’d say it is possible to make money gambling on sports.

Your chances of success: moderate

Slots and other casino games

Uh, probably not. Definitely not with slots, anyway. Unless you find a way to screw the system. Here’s a fun story of two guys who found a way to screw the casino in video poker.

The best odds are with full-pay video poker, craps, roulette, and baccarat, all with a house edge of less than 2%. You’ll still lose money over the long-term, but hey. If you go to Vegas and play the minimums, you could maybe get enough in free drinks to do okay.

Fun fact: back when I used to drink the alcoholic beverages, I found a keno machine in Vegas that let me play a penny per bet. I got six drinks for a total investment of $7 before stumbling back to my hotel room.

Your chances of success: almost zero, unless you’re okay getting paid in booze

Investing in the casino

Okay, this isn’t technically a way to make money gambling, but it is a way to make money off gamblers. Which is really close, dammit.

There are several ways you can do this. One stock I’ve invested in is Dover Downs Entertainment (NYSE:DDE), which owns a single casino in Delaware. It’s only breaking even on an income basis, but it trades for a mere fraction of its replacement value and is cash flow positive. It’s waiting patiently for the state legislature to pass a bill that gives it some relief on slot taxes. There seems to be political support for such a thing, it’s just a matter of getting it done.

But Dover Downs doesn’t pay a dividend, and people might not like it because shares only trade at $1. A couple of Canadian options are Gamehost (TSX:GH) and Great Canadian Gaming (TSX:GC). Both own physical casinos.

Let’s start with Great Canadian. It owns 13 casinos in Canada and 3 in the U.S. It’s comfortably profitable, trading at about 17x earnings. It’s currently flirting with a 52-week low, as are most Canadian consumer discretionary stocks. But it doesn’t pay a dividend, choosing to put all of its income back towards paying down debt.

The more interesting one — at least to me — is Gamehost. It owns a grand total of three casinos and two hotels in Alberta. The casinos are located in Calgary, Grande Prairie, and Fort McMurray, three places which aren’t doing well right now. The hotels are attached to the casinos in Calgary and Fort McMurray.

Gamehost’s management owns about 40% of the outstanding shares, something I always like to see. And the company is also sitting on a fairly healthy cash hoard, with shares trading at a reasonable 12.5x trailing earnings. It pays a real nice dividend too, coming in at 8.7%.

Your chances of success: high to very high

Two Side Hustles With Great Potential

On Monday, I took a look at some side hustles that I thought were good ideas. And then on Wednesday, I told you about side hustles that suck more than winter in Antarctica. If you’re here for the first time, go check those out. Today, I’m going to take a closer look at a couple side hustles I think most anyone reading this sack o’ crap great blog can start and be successful at.

Here’s the deal when it comes to certain industries, especially ones people do part-time. For the most part, the quality sucks. People are mostly content with the money they make from their 9-5, and so they don’t put a whole lot of effort into the side hustle. If something comes up, the side hustle automatically gets the boot. This leads to your customer(s) possibly getting upset and crying, because they are giant babies.



If you can do your side hustle as seriously as most people take work and there’s a market for it, I guarantee you will be successful. It might not happen soon, but if you stick with it, I know good things will happen. I’ve seen too many people completely half-ass their side hustle and still get success with it to think otherwise.

Buying and selling

You wouldn’t think so in 2015, but markets are still relatively inefficient. There are irrational people everywhere, almost begging for you to take advantage of them. I mean, check this out.


Is the person bidding just that bad at exchange rates, or do they really have the mental capacity of a 9-iron?

There’s countless opportunities to exploit this. Take the example I told you on Monday, video games. There are a lot of people who have these old games in their attic that are collecting dust, and no way to find the buyers who will pay top dollar for them.

Here’s what you can do. You find these games, and then flip them on eBay. Easy, peasy, and likely pretty profitable if you make sure not to pay too much. That’s step one, which you can take pretty far. You can cruise eBay for stuff that’s undervalued, or put ads in places that old people hang out, like the newspaper.

That’s a fine business, but why not take it up a notch? Go online and build yourself a website dedicated to retro gaming. Keep at it long enough, and you’ll build up a following that will not only buy from you, but will potentially pay you a commission to find them certain items that they’re too lazy to find themselves.

There’s also the potential to open up your own shop on a website like that — using other people’s inventory to supplement your own — or to sell ads. It might not be as potentially lucrative as something like pimping payday loans, but there’s still potential.

This doesn’t just work with video games. If you like fashion, do the same thing with thrift store finds. I’m sure a market exists for sports memorabilia too, or collectable books, or stamps, or coins, or a billion other things. The key is to find something that interests you.

Taking care of old people

I’m going to merge a couple of side hustle ideas into one here, and talk about the potential of becoming someone who helps out old people.

Like I mentioned in the original piece, 99% of the guys out there who will cut your grass or shovel your snow are useless. They don’t show up when they say they will, either because they take on too many clients, they’ve got a real job that comes first, or they’re 11. It’s the same thing with ladies and cleaning houses, because when was the last time a dude ever offered that service?

There are a mountain of baby boomers who are either a) too busy or b) too rich or c) too lazy to clean their own house and cut their own grass. If you can write a professional ad, show up when you’re supposed to, and wear a shirt that doesn’t have a beer logo on it, you’re in business. All it takes is one or two clients and it’ll eventually snowball.

I know someone who was a housekeeper for an old lady for years. She got paid extremely well for her time and I suspect eventually got a cut of the will. Do you think the old lady was coerced into doing that? Hardly. She was happy to pay to make sure things got done. That’s what happens when you get older.

As parents age and kids keep busy, people will be happy to pay somebody for an hour or two per day to show up and cook grandma dinner and keep her company. All you need is one or two of these and you’ll get yourself an easy $1,000 per month.

And that’s it. Honestly, you guys don’t need me to tell you how to hustle. Just get out there and do it already.

10 Overrated Side Hustles To Avoid At All Costs

Side hustle week continues here at Financial Uproar (where sexy times JUST DON’T QUIT). On Monday I looked at some side hustles you can totally do, and on Friday I’ll dig a little deeper into two I think are particularly attractive. And then I’ll grow tired of the subject and we won’t talk about it for the next 4.5 years.

For the most part, the side hustles I mentioned on Monday are things you can leverage into better things. If you’re a sports ref, you can leverage that into higher levels which pay more. If you’re a bartender, you might end up in charge of the other bartenders. The potential of blogging is pretty clear, and doing someone’s taxes could grow into giving them all sorts of financial advice for an hourly fee.

These next side hustles seem like good ideas, but in reality you’re just temporarily getting yourself a new job, and a crappy one at that. Don’t do them unless you’re desperate for cash. If you can, sell your body first.

1. Cashier at Wal-Mart

I think that more people should consider retail as a career. I’m convinced the sector has potential, but you gotta work hard at it. It probably doesn’t beat engineering, but it sure does beat a lot of other jobs that college dropouts have.

But let me tell you a little secret. Store managers secretly hate people who decide they’re going to work at a store on the evenings and weekends. Between an adult who is already working full-time and a high school student, most would take the high school student any day of the week.

After a few weeks or months of it, the ambitious adult isn’t so vigorous anymore. Suddenly they start calling in sick and asking to go home early. It’s not so much their fault, it’s just that they’ve bit off more than they can chew.

Plus, the pay is garbage. After a while, it’s hard to get motivated for 50¢ above minimum wage.

2. Babysitting

If you’re a mom who just had a kid and you’re looking to run a little business taking care of people’s kids while they’re at work, that’s one thing. It’s not really a scalable business, but it works. Plus, you can write off most of your housing expenses.

No, I’m talking about the traditional setup of going to the kid’s house and tucking him into bed at 9. Although I’m no one’s parent (at least until she makes me take the paternity test… I’ve said too much), there’s no way I’m hiring a 25-year old over a 13-year old. First off, the 25-year old is going to charge more. And secondly, I like the idea of giving some kid money for candy. A $2 tip is thrilling for a 13-year old. An adult is jaded enough to expect it.

3. A life coach

Unless you’re:

  • In the top 1% of your field
  • A millionaire
  • Have more to offer than “inspiration”

You have no business giving people tips on how to be successful or live their lives. Even worse is trying to do it as a half-assed side hustle. I’m at the point where I want to pay a couple of life coaches I know an hourly rate to just shut the hell up. Work harder at making your own life successful, and then we’ll talk.

4. A beauty consultant

For some reason, every woman’s fantasy is to tell other people how to do their makeup or what clothes to wear. This leads to approximately 97% of women who either a) seriously contemplate starting a fashion blog or b) post outfit selfies on Twitter/Facebook/Instagram.

I’m okay with the latter, because it amuses me how 97% of the women reading those updates are convinced the original woman can’t dress worth a crap, but will still leave supportive comments anyway. But the former? Nope. You’re not going to find anyone who gives you money for fashion tips.

It’s the same thing with working at the Gap. The only people looking for your opinion on clothes are guys who want to sleep with you. Have fun folding.

5. Making food in your house

It’s all fun and games when you and your BFFs are making cupcakes, but it all comes crashing down when your baking gives someone the runs and they call the health inspector. Hell, someone can call the health inspector just because you look at them wrong. Don’t give random soccer moms that power.

Oh, and spoiler alert: your cupcakes aren’t nearly as good as you think.

6. Mover

You know those muscles you haven’t discovered yet? Yeah, they’re gonna hurt in the morning.

Lots of people will hire guys off Kijiji when they need help moving, because they have friends that are smart enough to know free pizza isn’t nearly enough compensation for moving Bob’s 1,400 pound piano. But you’ll always be undercut by guys looking for beer money, and Bob is going to lose his mind if you put a nick in the wall of his new place.

7. Paper boy

You’re taking some 12-year old’s milk money and you have to get up early every day. I’d rather be poor. What a terrible job.

8. Collecting cans/cardboard/newspaper

Apparently not content to advise competing with children, side hustlers think you should lock horns with the homeless, the craziest members of society. In what world is this a good idea?

From The Simpsons, here’s recycling in a nutshell:

Principal Skinner: A half-ton of newspaper and all we get is 75 cents? That won’t even cover the gas I used to go to the store to buy the twine to tie up the bundles.

Hippie: It sounds like you’re working for your car-r-r. Simplify-y, ma-an!

9. Stupid jobs online for pennies

Yeah, pretty sure you’re not getting rich exchanging minutes of your time for 15¢. There’s a whole world of opportunity online. There’s also a lot of crap and a lot of people who get away with paying wages that would make a sweatshop owner in Cambodia blush. I don’t care how easy the job is, you’re better off holding out for something that takes a little skill.

10. Lemonade stand

Why don’t you just kick a 6-year old in the junk and take his money instead?