It was a quiet Saturday morning in the late 1980s when I sat beside my dad as he opened a newspaper to a page with neat columns of numbers. He went through them carefully with a trusty pencil, a thoughtful pause every now and then. Puzzled, I asked what he was reading. The simple reply would leave a legacy:

“Stock prices.”

That moment began a lifelong curiosity and passion for investments, a journey that’s been driven by the thrill of the hunt as well as the satisfaction of the reward. Just knowing where to look and how to look can unearth opportunities in the financial markets.

Investments can take many forms. Bonds, shares of stock, real estate, art, precious commodities, and, arguably, crypto. Even starting a business is an investment. What to choose depends on your circumstances, objectives, risk tolerance, and psychology. How much money and time do you have? What do you want to achieve? How much can you stand to lose? And as the poet Rudyard Kipling might ask, Can you meet with triumph and disaster and treat those two just the same?

In my experience, a lot of people usually want an investment that pays regular income. If that’s also your priority, then you can count on the three kings of cashflow – bonds, preferred shares, and real estate investment trusts.

High grade bonds: earn without losing sleep

Bonds are instruments whereby a government or company (bond issuer) borrows funds from investors (bondholders). To compensate you for lending money, the issuer will pay interest at a fixed annual rate. Interest payments are made quarterly or semiannually.

The issuer is obliged to return the borrowed sum (principal or face value of the bonds) by a certain date (maturity). When issued, bonds have a tenor – the duration until maturity – of at least one year.

Locally, bonds of the Republic of the Philippines are considered safest: they’re backed by the government’s power to tax and print money. On the other hand, bonds issued by domestic corporations are considered high-grade if they have a triple-A or double-A rating from a recognized credit rating agency, such as PhilRatings or CRISP. That means the issuer has a very strong capacity to repay its debt.

The virtues of holding bonds are twofold. First, you have a predictable stream of income over the life of the bonds. Second, there is contractual certainty that you will be repaid at maturity.

Last July, Aboitiz Power Corp., one of the largest companies in our energy sector, issued triple-A-rated bonds with a tenor of 10 years,, carrying an interest rate of 6.8572% per annum, payable quarterly. If you invested P1 million in the bond, you’d receive interest of P17,143 per quarter for the next 10 years. However, those interest payments are subject to 20% final withholding tax, so the amount you’d pocket is P13,714.40 per quarter. At maturity, the issuer would pay back your P1 million investment.

Investors can also make money trading bonds. After a bond is issued, it typically enters the secondary market platform of the Philippine Dealing & Exchange Corp. where any bondholder can offer a price at which they want to sell the bond, and prospective buyers can bid a price at which they are willing to buy it. All sorts of factors influence a bond’s price. Some are specific to the issuer, such as business performance. Others affect the economy more broadly, like the Bangko Sentral’s monetary policy. An investor can profit from price changes by buying low and selling high.

Ordinary investors will find bond trading challenging. For most of us, it’s better to keep it plain: invest in quality bonds with relatively high interest rates and let the cash roll in until maturity.

The minimum investment is usually P50,000, but the range can vary from P5,000 for government retail bonds to P1 million for some bank bonds. You can order or buy them through any major bank where you have an account.

Some solid issuers expected to offer bonds in the fourth quarter of this year are Ayala Land Inc. and SM Prime Holdings Inc.

Preferred shares: extra risk, extra return

Shares of stock are a piece of ownership in a corporation. Like bonds, issuing shares is a way for companies to raise money from investors. But unlike bonds, a company is not obliged to return your investment in its stock. Remember, a shareholder is not a lender but an owner.

There are two types of shares in the local stock market: preferred shares and common shares.

Generally, preferred shares have three key features:

* They offer the investor regular payments called cash dividends at a fixed rate per annum.

* The company has an option to “call” or redeem the shares after a given period. A call or redemption occurs when the company takes back your shares and returns the issue price.

* If the shares are not redeemed by a certain date, the initial dividend rate will “step up” to a higher amount. The step up is significant since it’s intended to push the company to redeem the shares by that point.

Let’s illustrate these. In August, Filinvest Development Corp. (FDC), a holding company that controls Filinvest Land and EastWest Bank, issued Series B Preferred Shares at a price of P1,000 per share with an initial dividend rate of 7.1087% per annum, payable quarterly. The shares have a “non-call 5, step-up 7” structure. What do these tell us?

1. If you invested P1 million when the shares were issued, you’d have 1,000 preferred shares.
2. Initially, you can expect P17,771.75 in cash dividends each quarter. After deducting a 10% final tax for individuals, you’d get P15,994.58 quarterly.
3. Non-call 5 means that FDC cannot redeem the shares prior to the 5th anniversary of the issue date. Which also means FDC may call the shares starting on that anniversary.
4. Step-up 7 signifies that if the shares are not called by the 7th anniversary of the issue date, the dividend will adjust to a higher rate. It could potentially jump to an exorbitant level that practically ensures FDC would redeem the shares before the dividend steps up.

Keep in mind that a company has no obligation to pay dividends or redeem shares. Sure, preferred shares have a condition that unpaid dividends will accumulate, but there’s no assurance they’ll be paid out. Phoenix Petroleum Philippines Inc., once a fast-growing fuel retailer, stopped paying dividends on its preferred shares due to heavy losses.

Quality preferred shares are a desirable alternative to bonds as a source of steady income. Compared to bonds, preferred shares generally have higher yields and lower tax. Though they have no fixed maturity, most issuers intend to redeem them before the dividend steps up, making these instruments behave like bonds.

Moreover, preferred shares are listed on the Philippine Stock Exchange (PSE), making it easy to buy and sell them through any licensed stockbrokerage. On occasion, you can take advantage of fluctuations in their market price to scoop up bargains.

In November 2024, the market price of Megawide Construction Corp.’s Series 2B Preferred Shares had fallen to around P94.05 per share, below its issue price of P100 in 2020. I grabbed the opportunity to buy. The shares were due to step up in November 2025, and I was confident the company would redeem them at P100 by then. Even better, Megawide was set to pay dividends of P5.75 per share over that period. The total return would exceed 12% for a year’s wait. That’s superb for preferred shares with a low risk profile.

You don’t need a large budget to invest in preferred shares. In the primary market, the usual minimum investment is P50,000, but after they’re listed on the PSE, you have a lot of flexibility on how much to invest.

New preferred shares to look forward to in the coming months are those of San Miguel Corporation (SMC) and Globe Telecom Inc. My estimate is that the upcoming SMC preferred shares will have a dividend rate in the vicinity of 7.00% per annum.

Real estate investment trusts: cash flow with capital appreciation

Real estate investment trusts, or REITs, are companies with a portfolio of income-generating real estate. What’s unique is they’re required by law to pay at least 90% of their earnings as dividends to their shareholders every year.

Common shares of reputable REITs are a source of passive income and possibly capital appreciation. The key is to invest in a REIT that has a generous dividend yield, well-tenanted prime assets, and a sponsor that can infuse more properties into the REIT. Like preferred shares, you can buy REIT shares through a stockbrokerage.

A promising REIT I’m looking at is MREIT, Inc. It has a portfolio of 24 prime office, hotel, retail, and other commercial properties across the Philippines, with a total gross leasable area of 480,000 square meters. Its sponsor and majority shareholder, Megaworld Corporation, one of the country’s top real estate developers, plans to put more assets into MREIT and double its leasable space within two years.

MREIT’s market price on the PSE has been quite volatile, but if you’re able to buy it at P13.50 per share, the expected dividend yield is at least 7.40% per annum. For an individual subject to 10% final tax, your net dividend comes to 6.67% per annum.

What if the stock falls below P13.50? Assuming MREIT’s fundamentals remain intact and dividends stay the same, it would be an opportunity to accumulate because the lower the price, the higher the dividend yield. How so? MREIT’s current annual dividend payout is around P1.00 per share. If the share price slips to P13.20, then P1.00 divided by that price implies a yield of 7.60%. And if the price drops to P13.00, then the dividend yield goes up to 7.70%.

I have conviction that MREIT’s share price will move up eventually, perhaps to P20.00 per share in the next few years. It offers a good balance of cash flow and capital growth.

If your goal goes beyond the confines of income and into the realm of pure capital appreciation and perhaps aggressive wealth creation, then you’ll have to put money to work in other common shares. More on that in my next article.