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As painful as owning Apple Inc. shares has been in the past 12 months – at one point, they were down by nearly half from their high – investors could at least take comfort in the $100-billion-plus mound of cash that the company is gradually, grudgingly, giving up.

Indeed, Apple's perceived transformation from a growth story to an income investment is driving many of the investors who have piled in to the stock, even as others have fled. The company said in April that it would double its "capital return" program, boosting its dividend and increasing its share buybacks.

Yet, it's another, lesser-known decline in an Apple-related investment that suggests another, potentially superior way to get your hands on Apple's cash: The company's bonds.

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In April, Apple floated what was at the time the largest corporate bond sale in history – $17-billion (U.S.) – to get cash to finance its dividend and buybacks. Moody's Investor Service assigned the debt a rating higher than all but four non-financial companies in the world.

And, like nearly all things Apple, it generated widespread excitement out of the gate: The company obtained super-low interest rates, and then investors actually paid above "face value" for the bonds once they began trading.

What does that mean? Well, bonds that pay interest regularly to their holders are sold at face value. While any bond can sell above face value in the secondary market because of changes in interest rates, the prices for Apple bonds were widely seen as being driven by the unusually high level of demand for them.

But not even Apple can defeat the fundamental laws of bond pricing. Rates have risen since April, which makes Apple's bonds less attractive compared with other corporate debt issued later in the year. Indeed, Apple's 30-year bonds lost 9 per cent of their value in their first six weeks, meaning initial investors lost more than two years' worth of interest in that time. They've fallen further since.

This, however, is good news for people who didn't buy in the beginning. According to bond-pricing data from the Financial Industry Regulatory Authority Inc. (Finra), the company's 30-year bonds with a stated interest rate of 3.85 per cent are trading for just over 84 cents on the dollar – a yield to maturity of 4.86 per cent. That's twice as high as the stock's dividend yield of 2.4 per cent.

Apple's 10-year bonds are experiencing something similar: They have a stated coupon of 2.4 per cent but, by trading at a little less than 90 cents on the dollar, they yield 3.68 per cent, according to Finra data.

Now, here's the downside: If you believe that interest rates are on a long-term upswing, Apple's bonds are more likely to continue their slide than rebound in value, because of the inevitable math of bond pricing. That could be a problem if you need to cash out in the next decade or so.

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They also, quite obviously, don't have the upside of Apple's shares. But you have to wonder what that is, exactly. Investors obsess over Apple stock, whipping it up and down on the latest rumour. Those who bought at around $500 late last year, sensing a bargain (and I am one of those, with my 10 shares), watched helplessly as they shed another 20 per cent in value. Only now, after recent iPhone excitement, are they break-even.

We can say the shares are undervalued all we want; there seems to be plenty of market forces holding them back. It's entirely possible Apple shares will trade in a flat range from this point on.

Which, if you strip away the chance for massive capital appreciation, makes them a lot like … bonds. But with half the income, and at least as much downside risk. All of which suggests that income-oriented investors should be looking at more than just Apple stock.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More


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