Editor's note: Many everyday investors never leave the world of stocks...

It's comfortable and familiar. And it's probably what their brokers tell them to do.

However, investing involves much more than just stocks – including corporate bonds, for example. Yet the vast majority of investors have never bought a bond. Many don't even know about them.

So in this weekend's Masters Series, we're featuring an exclusive interview with Stansberry's Credit Opportunities editor Mike DiBiase to introduce you to the concept...

In the first installment today, Mike covers the basics of buying bonds... explains why they're much safer than owning stocks... and provides a glimpse into his exhaustive research...

Diving Into the Basics of This 'Safer Than Stocks' Strategy

An interview with Mike DiBiase, editor, Stansberry's Credit Opportunities

Dean Jones Jr.: Good morning, everyone. I'm here today with Mike DiBiase...

Mike joined Stansberry Research in 2014 after spending nearly two decades in the world of finance and accounting. He previously served as the vice president of finance and planning for a large, publicly traded software company. During his tenure, the company grew its revenue from $40 million to more than $1 billion. In the past, he also worked for one of the "Big Four" international accounting firms and spent about five years as an auditor.

Of course, Stansberry Research readers likely recognize Mike as the editor of our distressed-debt newsletter, Stansberry's Credit Opportunities. He's also one of the senior analysts and contributors to our flagship newsletter, Stansberry's Investment Advisory.

Mike, I wanted to talk a bit about your work in Stansberry's Credit Opportunities this weekend. I'd like to help Digest readers learn more about how to invest in bonds.

So let's start at the top for those who might not be familiar... What is a corporate bond and how is investing in this space different from buying stocks?

Mike DiBiase: A corporate bond is simply a loan made to a business.

Companies borrow money for all sorts of reasons. They do it to fund the purchases of new buildings and equipment... to help pay for the costs of acquiring other companies... or to buy back their own stock, for example. Companies can borrow money from banks, of course, but they can also borrow money by issuing bonds.

With newly issued bonds, companies sell the securities in exchange for cash. Newly issued bonds are sold to institutional investors. Ordinary investors can't buy them.

But once a new bond has been issued, ordinary folks can buy them in secondary markets just like you can buy shares of stock.

However, many folks have never considered buying corporate bonds. And that's a big mistake... You see, bonds are much safer investments than stocks.

That's because when a company issues a bond, it guarantees it will pay you. If it doesn't, it will be considered in default and enter into bankruptcy. We like to say bonds are binary – they're either paid back in full, or they default. Those are the only two outcomes.

Dean: Unlike a stock, which can go up, down, or anywhere in between on any given day... So it seems like the day-to-day price movements don't really matter much with bonds.

Mike: That's right. Another big difference with bonds is that when you buy a bond, you know exactly what your return will be... as long as the bond doesn't default. You know exactly how much – and when – you'll get paid back. The price fluctuations in between don't matter.

There are the two main components of a bond – the principal and interest.

The principal is what was loaned to the company. It's repaid at a set date in the future. Typically, it's 10 years from the date the company first issued the bond.

And generally, bonds in the U.S. are issued in $1,000 increments known as "par value." If a company is looking to raise $40 million, it will sell 40,000 bonds ($40 million divided by the $1,000 par value per bond). A bond trading at "par" means it costs $1,000 to buy it. When brokers quote bond prices, they drop a zero... So you'll probably see it quoted at "100."

The second component is the bond's interest coupon. The coupon is quoted as a fraction – or a percentage – of par value. A bond issued with a 6.5% coupon would pay its owner $65 per year in interest.

These coupons are generally paid twice a year... For example, for a 6.5% coupon bond issued in December, you would be paid $32.50 in June and $32.50 in December each year through the maturity date. The coupon payments are fixed and don't change, no matter what happens with general interest rates.

And it's important to remember... a bond constitutes a legal promise to repay. The principal and interest payments are guaranteed and carry the force of law. With stocks, companies make no promises about dividends or returns.

That's why bonds are much safer to own than stocks.

Dean: So if some of our readers today are interested in buying these bonds, can they just do it online in their regular brokerage accounts? Or does it take some extra effort?

Mike: Unfortunately, it takes a little extra effort. But the extra effort is well worth the reward...

The reason it takes extra effort is part of why investing in corporate bonds can be so lucrative. You see, Wall Street doesn't want you to buy corporate bonds...

Wall Street wants you to buy stocks. That's how the big banks make their money. If you call a broker, you'll never hear them trying to get you to buy a corporate bond... But they'll talk all day about which stocks you should own.

There are a few other reasons why it's a little more difficult to buy bonds than stocks...

Unlike publicly traded stocks, no central place or exchange exists for bond trading. Instead, bonds are traded over the counter through a network of bond dealers. These dealers are typically major investment banks – like JPMorgan Chase (JPM) and Morgan Stanley (MS). They buy and sell huge volumes of bonds. And they quote prices to buy or to sell them.

On top of that, the bond market is less liquid and less efficient than the stock market...

Most everyday investors know nothing about corporate bonds.

There is limited access to information about these securities, and their filings with the U.S. Securities and Exchange Commission are hundreds of pages long. That intimidates most investors, even professionals. And most institutional investors won't buy (and often are not allowed to own) what are considered riskier corporate bonds.

My colleague Bill McGilton and I read these documents and take care of all the hard work for you.

To buy corporate bonds, you first need to choose a broker if you don't already have one. You may have to apply with your broker to be able to buy and sell corporate bonds.

You need to give your broker this information about the specific bond you want to buy...

1. How many bonds you want to buy
2. The name of the borrower/company
3. The interest coupon
4. The maturity date
5. The CUSIP number

A CUSIP number (pronounced "Q-sip"), is a unique nine-digit code assigned to every bond. Don't let that intimidate you... Think of it like a stock ticker. Using the CUSIP number along with the description eliminates any possibility of error.

The bond market is not like the stock market, where every stock is available to every broker. Some brokers will have a particular bond available for you to buy... and some won't. So you might have to contact a few brokers to find one that is willing to sell the bond.

Fortunately, here in 2020, buying corporate bonds is a lot easier than it used to be...

Nowadays, most major brokers allow you to place an order online for a particular bond with a click of a mouse, just like a stock. But even today, other brokers won't let you do that. It depends on the particular bond and the broker.

The bottom line is that a little more effort on your part may be required. Occasionally, you may have to pick up the phone and give your broker's fixed-income department a call.

But please, don't let a little extra work discourage you from buying corporate bonds. As I've said, it's these inconveniences that create opportunities... Bonds regularly become mispriced relative to their underlying value and safety.

Dean: What do you mean by that?

Mike: Well, that hits on our main focus in Stansberry's Credit Opportunities...

We look for "distressed bonds." By that, we're talking about bonds that are trading for much less than their par value ($1,000). When you buy a bond below par value, you earn more than just interest on your investment... You also earn capital gains.

Capital gains are equal to the bond's discount. That's the difference between the bond's par value and what you paid for it. So when you buy a distressed bond, your total return will be the combination of the bond's interest payments while you hold it plus the capital gains.

For example, let's assume you buy a bond issued by ABC Company for $800...

The ABC Company bond pays an 8% coupon and matures on December 15, 2025. (The bond would be known as the "ABC Company 8% December 2025 bond.")

This bond pays $80 per year in interest through maturity ($1,000 par value multiplied by 8%). Interest is paid in semiannual installments of $40 on June 15 and December 15 of every year. But because you paid only $800 for this bond, you'll actually earn an interest rate of 10% per year ($80 divided by $800 purchase price)... higher than the 8% coupon rate.

And on top of that, you'll also earn a capital gain of 25% – or $200 ($1,000 par value less $800 purchase price) – when you are paid the full par value of the bond at maturity.

It's these capital gains that make distressed bonds such great investments.

You can earn equity-like returns with much safer investments than stocks. Remember, as long as the company doesn't default, you know what you'll ultimately get paid at the time of your investment.

The key is finding distressed bonds that are safe... that will pay us all of our principal at maturity and interest along the way.

Dean: How do you find the best opportunities to recommend to subscribers each month? I know you love to crunch all kinds of numbers and data. What's your typical process?

Mike: That's a great question. In Stansberry's Credit Opportunities, we do all of the work for you...

Bond prices are constantly moving, just like stock prices. Bill and I pour through the entire U.S. corporate bond universe every month. That's around 40,000 bonds. We're looking for what we call "outliers"... safe bonds that are trading for big discounts to par value.

In our work, we don't rely on the credit-ratings agencies – Moody's, Standard & Poor's, and Fitch Ratings – to tell us which bonds are safe. We learned from the last financial crisis that the credit-ratings agencies don't always get it right... They gave many companies high credit ratings right up until the time they went bankrupt.

So instead, we apply our own proprietary credit rating to each bond. Then, we compare the price of each bond to our credit rating. And we're looking for bonds that appear to be much cheaper than they should be given their safety. They're the outliers we want to recommend.

Dean: So once you find an outlier through your research, what's next? I believe you've stressed to me before about two key factors to look for when determining if a bond is safe...

Mike: That's right. The first step is just finding what appear to be the outliers.

Once we find a handful of candidates, we roll up our sleeves and start investigating this group of bonds in much more depth. We analyze the companies' financial statements and projections for the future. We study the companies' debt structures... understanding what other debt they have and when it's due.

The first question we always ask is, "Can it pay us?" By that, we mean can a company afford to pay its interest. And we don't mean just the interest on the bond we're recommending... We mean all of its interest on all of its outstanding debt.

If a company can't afford that, its creditors could force it into bankruptcy. We like to see companies with cash earnings that cover their interest costs several times over. That tells us the company has a built-in cushion for earnings to fall for some unforeseen reason and still be able to afford its interest.

Next, we look at the worst possible outcome for us as bond investors... bankruptcy.

We never recommend bonds that we think will default. But of course, it's always a possibility. So going in, we want to know our worst-case scenario... where the company's assets are sold off and the proceeds are used to pay off its creditors.

If that were to happen, we want to know how much we can expect to receive...

Bill is a former corporate lawyer. He studies all of the company's debt agreements to understand the order in which the creditors would get paid if the company were to default.

We then perform a "liquidation analysis" for every bond we recommend. We estimate how much the company's assets could be sold for and how much we could expect to recover in bankruptcy based on where our bond sits in the company's debt structure.

Bondholders fare much better than stockholders in a bankruptcy. Stockholders get wiped out. But over the long term, Moody's found that corporate bondholders recover an average of about $0.40 on the dollar in bankruptcy. That means you'd collect $400 of your principal even if the company defaulted.

For some of the bonds we've recommended in the past, the recovery estimates have been much higher. Sometimes, it's even higher than the prices of the bonds we recommend.

So in those situations, we're investing in these distressed bonds with virtually no downside.

Editor's note: Thanks in part to the type of research Mike does in Stansberry's Credit Opportunities, one paid-up subscriber retired early at age 52... and is now weathering the coronavirus crisis without losing any sleep. He's under orders to "shelter in place"... so he recently revealed all the details from his own living room. Watch the video right here.