Apple Inc. (AAPL) iBond-ies Must Watch For This

Lesson 3: Dividend yields continue to pull investors into stocks.
With the offering, Apple joined the ranks of Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), Microsoft Corporation (NASDAQ:MSFT), and many other major companies that have dividend yields well in excess of the rates on their 10-year debt. Given the choice to take a smaller yield for a security with no growth potential whatsoever versus a higher yield for the riskier but potentially more lucrative stock, income investors have been willing to take on extra risk.

Companies recognize that fact, using it as a direct justification for doing bond offerings in the first place. The entire purpose of Apple Inc. (NASDAQ:AAPL)’s borrowing is to help finance its share buybacks and dividend increase. In Apple’s case, the increase in risk even from $17 billion in debt is relatively small, but stock investors more generally need to consider debt in deciding whether a high dividend yield is worth the potential for more substantial losses from owning stock.

Keep your eyes open
Bond investors have enjoyed huge capital gains from falling rates for decades. But with Apple and other companies dumping tens of billions of dollars of debt onto a willing bond-buying community, you should think twice before you add to your own bond holdings at current rate levels.

The article 3 Key Lessons Apple Has for Bond Investors originally appeared on Fool.com is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Apple. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Apple, Coca-Cola, Johnson & Johnson, and Nike. The Motley Fool owns shares of Apple, Johnson & Johnson, Microsoft, and Nike.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.