Who leaves home without American Express? Not Ken Chenault, who carries Green, Gold and Centurion cards, as well as an AmEx credit card that helps him earn Delta SkyMiles. “It is important to eat what you cook,” says Chenault, who has been chief executive of American Express (ticker: AXP), the New York-based provider of credit- and charge-card products, since 2001.

The American Express card, like Coca-Cola and Mickey Mouse, is recognized almost everywhere. Not so Chenault, 60, although he has led the company with a sure hand through some of the most horrific episodes in recent American history, including the destruction of the World Trade Center by terrorists in 2001, right across the street from AmEx headquarters, and the credit crisis of 2008-’09, which humbled most of the country’s largest financial institutions and destroyed some of the rest.

While American Express’ success has kept its boss out of the headlines, not to mention Congress’ crosshairs, Chenault’s quiet competence, creative thinking and unwavering focus on integrity have impressed other corporate chiefs, including Warren Buffett, whose Berkshire Hathaway (BRKA) owns 13% of AmEx. Berkshire has taken the unusual step of agreeing to vote its shares with management so long as it owns 5% or more of the AmEx and Chenault is CEO. “Warren has given me his proxy,” Chenault told attendees at American Express’ annual meeting in April 2010.

LOU GERSTNER, WHO HIRED Chenault at AmEx in 1981, and later went on to run RJR Nabisco and IBM (IBM), is another fan. Chenault was assigned first to a newly formed strategic-planning unit, and charged with analyzing the company’s sluggish merchandise-services business, which sold watches, mink coats and other products to card holders via direct-mail inserts into their monthly bills. Gerstner recalls Chenault as “quite an impressive young man” who was “insightful in being able to separate important facts from less important facts.”

Chenault quickly separated himself from strategic planning and asked to work in merchandise services, where he was able to double sales to around $500 million in two years by matching product pitches with customers’ interests. Thanks in large part to his marketing instincts, American Express became one of the biggest sellers of luggage sets in the U.S.

“What I am most proud of—and it has been a theme throughout my career—is a willingness to take on the status quo and bring about change,” Chenault says. “We grew the [merchandise-services] business tremendously. I learned so much about how to change an organization, challenge the status quo and drive results. Frankly, I was also fortunate that it wasn’t a business people understood a great deal, and that allowed me a level of responsibility that was terrific.”

Chenault’s envelope-pushing as well as his consensus-building skills also have benefited other companies, including IBM, on whose board he has served for 14 years. When Big Blue was weighing whether to sell a majority stake in its personal-computer business to a Chinese company in the early 2000s as part of its shift into software and consulting, Chenault “really encouraged us to divest the business,” says Sam Palmisano, who recently retired as IBM’s CEO. “He understood it intellectually, but he also helped to get a common point of view to execute what we thought was strategically important.”

CHENAULT WASN’T BORN TO BE the consummate corporate manager, although he had ample training for the role. His father, Dr. Hortenius Chenault, was a dentist on Long Island, and his mother Anne, now 98, a dental hygienist. Both, he notes, had a passion for learning, and a focus on values, “so integrity is something I talk about a lot.”

Chenault attended Springfield College in Massachusetts and transferred after a year to Bowdoin, an elite liberal-arts school in Maine. He excelled academically, graduating magna cum laude in 1973 with honors in history. From Bowdoin he went on to Harvard Law School and Rogers & Wells, a law firm in New York, before landing at Bain & Co., the management consultant.

When Chenault arrived at American Express, conglomerates were the rage, and AmEx was on a buying spree. It acquired, among other outfits, the brokerages Shearson Loeb Rhoades and Lehman Brothers, Kuhn, Loeb, as well as Investors Diversified Services, which was renamed American Express Financial Advisors. Eventually all were unloaded, the last in 2005, when the financial advisory business was spun off to shareholders.

Today Chenault presides over a sprawling global enterprise whose customers rang up $822 billion of charges last year on 97.4 million cards. The brand’s cachet stems from its affluent customers, who spend an average of four times as much as MasterCard (MA) shoppers, and its customer service. American Express’ U.S. market share has risen steadily in the past decade, to 26.4% through mid-2011 from 19.5% in 2002, according to the Nilson Report. It is about even with MasterCard’s share, although both are well behind industry leader Visa (V), with 43% of the market.

AmEx, which was founded in 1850, earned $4.9 billion, or $4.12 a share last year, on revenue of $30 billion. About 55% of revenue came from fees charged to merchants who accept AmEx cards, and 20% was generated by lending money to customers, typically on revolving credit cards, or those whose balances aren’t paid off every month. AmEx charges merchants 2.54% of the value of each transaction, and shares a portion of fees with the banks that issue American Express cards. That’s another thing that sets AmEx apart from other card issuers, Chenault notes. “If you are reliant on the lend-centric model, it is going to be far more challenging,” he says.

Under Chenault’s leadership, American Express shares have returned 26.8%, dividends included, endowing the company with a current market value of $61 billion. Shares have narrowly beat the Standard & Poor’s 500, which has returned a total 25.9% since 2000.

ELEGANT AND POLISHED, YET down to earth, Chenault quickly puts a visitor at ease as he sips a cup of tea during an interview in a conference room adjacent to his office. Both are situated on the 51st floor of the northern tower of the World Financial Center, with a grand view of New York Harbor and the Statue of Liberty. Chenault says he is a big believer in “constructive confrontation,” which he encourages in meetings. Borrowing a famous phrase from Napoleon, he says the role of a leader is “to face reality but give hope.”

Chenault counsels other executives to “stand for something” and be clear about their values. He also encourages them to push for change. “One of the lessons I often talk about, both inside and outside the company, is that you can become very complacent with success, and success can become a rut,” he says.

After his successful stint in merchandise services, Chenault was promoted to the card business, which was losing ground to competitors. Unlike Visa and MasterCard, AmEx couldn’t have banks issue credit cards in the U.S., a restriction that the courts lifted in 2004. Within the company, he says, “there was too much of a focus on the tried and true, and not enough innovation.” Chenault says he tried to bring a sense of urgency to a unit that too often downplayed competitive threats.

Amex introduced its first revolving-credit product, the Optima Card, in 1987. It enabled customers to carry monthly balances. Still, the company’s card business was losing market share, and a group of restaurant owners in Boston revolted in 1991, refusing to use AmEx cards because they thought the fees they paid were too high. Partly because of that incident, known as the Boston Fee Party, the company eventually lowered fees in some markets and broadened its merchant base to include supermarkets, drug stores and other vendors.

Chenault continued to push for new initiatives, including the launch of the membership miles program in 1991. Four years earlier, he says, AmEx had turned down an opportunity to have a co-branded card with American Airlines, a move he calls “a total misunderstanding of how you judge customer needs.” He lobbied to broaden the credit-card portfolio because “we hadn’t focused enough on segmenting customer needs and developing different products to meet customer segments.”

Chenault was named president of Travel Related Services, Gerstner’s old job, in 1993, overseeing the card and travel business in the U.S. Four years later, still in his mid-40s, he became president and chief operating officer of American Express, and on Jan. 1, 2001, succeeded Harvey Golub as CEO. Today he is one of only four African-American CEOs in the S&P 500.

CHENAULT REGARDS both Gerstner and Golub as important mentors. In addition to helping him become a better problem solver, Gerstner taught him “not to identify with your job alone.” Chenault says he tries to be with his wife, Kathryn, and their two college-age sons, as often as he can, especially on weekends and vacations.

Golub was a mentor of another sort. “Harvey was tough-minded, but I found him straightforward,” Chenault says. “What he didn’t tolerate were people who tried to wing it. You had to know the facts. You had to articulate the issues. He had no problem with people who said, ‘Look, I don’t know.’ But if you said, ‘I know’ and you didn’t know, you had a problem.”

No amount of mentoring could have prepared Chenault for the signal event of his first year as CEO: the 9/11 attacks. On that day he was traveling for business in Salt Lake City, where he worked the phones to coordinate the company’s response. Eleven AmEx employees were killed at the Trade Center, and the company was forced to relocate its headquarters for the next eight months. “While I talked to our board and other leaders in the company, this is one where you had to lead from your instincts and experiences and values,” he says.

The financial crisis six years later posed a different challenge, although American Express managed to stay profitable through the debacle and maintained its dividend, now 72 cents a share. To shore up its funding, the company started gathering retail deposits, which now total $37 billion. At the same time, AmEx continued to invest in areas such as customer service, and acquired a portfolio of corporate credit cards from General Electric (GE) for $1.1 billion. Chenault says his biggest disappointment as CEO is that “the housing decline really impacted our business, and I wish we had seen it earlier.”

So do most CEOs, especially of consumer and finance companies. American Express, at least, faced reality, and its values-minded chief continues to give hope.

E-mail:
editors@barrons.com

By ALEXANDRA ALTER

This summer, Darcie Chan’s debut novel became an unexpected hit. It has sold more than 400,000 copies and landed on the best-seller lists alongside brand-name authors like Michael Connelly, James Patterson and Kathryn Stockett.

It’s been a success by any measure, save one. Ms. Chan still hasn’t found a publisher.

Five years ago, Ms. Chan’s novel, “The Mill River Recluse,” which tells the story of a wealthy Vermont widow who bestows her fortune on town residents who barely knew her, would have languished in a drawer. A dozen publishers and more than 100 literary agents rejected it.

“Nobody was willing to take a chance,” says Ms. Chan, a 37-year-old lawyer who drafts environmental legislation for the U.S. Senate. “It was too much of a publishing risk.”

This past May, Ms. Chan decided to digitally publish it herself, hoping to gain a few readers and some feedback. She bought some ads on Web sites targeting e-book readers, paid for a review from Kirkus Reviews, and strategically priced her book at 99 cents to encourage readers to try it. She’s now attracting bids from foreign imprints, movie studios and audio-book publishers, without selling a single copy in print.

The story of how Ms. Chan joined the ranks of best sellers is as much a tale of digital marketing savvy and strategic pricing as one of artistic triumph. Her breakout signals a monumental shift in the way books are packaged, priced and sold in the digital era. Just as music executives have been sidestepped by YouTube sensations and indie iTunes hits, book publishers are losing ground to independent authors and watching their powerful status as literary gatekeepers wither.

Self-publishing has long been derided as a last resort for authors who lack the talent or savvy to hack it in the publishing business. But it has gained a patina of legitimacy as a growing number of self-published authors land on best-seller lists. Last year, 133,036 self-published titles were released, up from 51,237 in 2006, according to Bowker, a company that tracks publishing trends.

A handful of self-published authors have achieved blockbuster status, selling more than a million copies of their books on the Kindle. While they represent a tiny minority of independent authors, the ranks of the successful are growing. Thirty authors have sold more than 100,000 copies of their books through Amazon’s Kindle self-publishing program, and a dozen have sold more than 200,000 copies, according to Amazon. The program, which Amazon launched in 2007, allows authors to upload their books directly to Amazon’s Kindle store, set their own prices and publish in multiple languages. Barnes & Noble followed suit in 2010 with a similar program for its Nook e-reader.

Self-published titles have been buoyed by an explosion in digital book sales. E-book sales totaled $878 million in 2010, compared to $287 million in 2009, according to the Association of American Publishers. Some analysts project that e-book sales will pass $2 billion in 2013.

The march of self-published authors has put publishers and literary agents on guard. Publishing houses like Penguin and Perseus have recently launched their own digital self-publishing programs in an effort to capture a slice of the mushrooming market. Some agents, including Scott Waxman, have started their own digital imprints.

Digital self-publishing still has serious drawbacks. Though e-books are the fastest-growing segment of the book market, they still make up less than 10% of overall trade book sales, according to the Association of American Publishers. Book reviewers tend to ignore self-published works, and brick-and-mortar bookstores have long shunned them. And very few authors have a marketing and advertising budget equal to a publisher’s.

Several successful self-published authors have gone on to cut deals with major publishers. After selling around 1.5 million digital copies of her books on her own, 27-year-old fantasy writer Amanda Hocking signed with St. Martin’s Press. She won a $2 million advance for a new four-book fantasy series called “Watersong”; St. Martin’s will also reprint her best-selling self-published “Trylle” trilogy about attractive teenage trolls.

Self-published thriller and Western writer John Locke, whose 13 books have sold more than 1.7 million digital copies, signed an unusual contract with Simon & Schuster in August. The publishing house will print and distribute his books—the first title comes out next month—while allowing Mr. Locke to remain as the publisher. Mr. Locke is paying for the printing, shipping and marketing costs himself, according to his agent. The print editions, which will sell as mass-market paperbacks for $4.99, won’t be edited. “The opportunity to get into bookstores, Targets, Wal-Marts, Costcos, airports—I can’t do that as an independent author,” Mr. Locke says.

J.A. Konrath, a mystery writer who has sold 400,000 digital copies of his self-published books, earning some $500,000 a year, signed a contract with Amazon’s new mystery imprint to publish his novel “Stirred,” co-written with Blake Crouch, digitally and in print. It recently hit No. 1 on the Kindle top-100 list. Mr. Konrath says he was won over by Amazon’s powerful marketing machinery. “They can really blow my books up,” he says.

Ms. Chan lives in a spacious, two-story house on a quiet street in Cortlandt Manor, N.Y. She and her husband, Timothy Chan, met in high school, at a national science competition. They reunited in Maryland, where he attended medical school and she completed a law degree at the University of Baltimore.

For the past 15 years, she’s worked for the federal government on the natural-resource team for the Senate’s Office of the Legislative Counsel, where she drafts legislation concerning clean air and water, highway infrastructure and climate change. She works remotely, from her home, from 9 to 6, and then takes care of her toddler son until her husband gets home. She squeezes in a couple of hours of writing each night.

She started writing fiction in 2002, when she suddenly had a lot of time on her hands. Her husband, an oncologist and cancer researcher at Memorial Sloan-Kettering, was spending long hours at the hospital at the beginning of his residency, so she spent her nights alone writing.

She came up with the story of a wealthy, agoraphobic Vermont widow who makes anonymous gifts to the townspeople who ignore and fear her. Ms. Chan says she was inspired by the true story of a resident of Paoli, the small Indiana town where she grew up. “The Mill River Recluse” takes place in a fictional Vermont town with a quirky cast of characters—a kleptomaniac priest with a spoon fetish, a dotty woman who tries to sell her neighbors love potions, a bad cop whose off-duty hobbies include stalking and arson.

The novel took her 2½ years to write. After seeking feedback from family and friends, she sent queries to more than 100 literary agents. Most rejected it as a tough sell. “It didn’t really fit any genre,” Ms. Chan says. “It has elements of romance, suspense, mystery, but it falls into the catch-all category of literary fiction, and of course that’s the most difficult to sell.”

She finally landed an agent, Laurie Liss at Sterling Lord Literistic in New York, who represents cable-news host Rachel Maddow. Ms. Liss submitted the manuscript to a dozen publishers, all of whom turned it down. Ms. Chan stashed the manuscript in a drawer, and buried herself in her legislative work.

Five years passed. Then, this past spring, she started reading about the rise of e-book sales and authors who had successfully self published, and decided to give it a shot. She fashioned a cover image out of a photograph her sister took of a mansion in Paoli, and she and her husband used Photoshop to add some gloomy ambience. Then she nervously uploaded her manuscript to Amazon’s Kindle self-publishing program. She sold a trickle of copies. A few weeks later, she started selling it on Barnes & Noble’s Nook and through SmashWords, a self-publishing program that distributes to major e-book retailers including Apple’s iBookstore, Sony and Kobo. Her first royalty check from Amazon was for $39.

She noticed that a lot of popular e-books were priced at 99 cents, and immediately dropped her price from $2.99 to 99 cents. The cut would slash potential royalties—Amazon pays 35% royalties for books that cost less than $2.99, compared with 70% for books that cost $2.99 to $9.99. But sales picked up immediately. “I did that to encourage people to give it a chance,” she says. “I saw it as an investment in my future as a writer.” The strategy worked. Several reviewers on Amazon said they bought the book because it was 99 cents, then ended up liking it.

She checked her sales several times a day, obsessively refreshing her Amazon page. In the first month, it sold 100 copies. When Ms. Chan saw the sales figure, she danced in her kitchen with her husband and toddler.

“We were saying, ‘Wow, this is really cool. What if you sell 1,000? That would be awesome,’ ” her husband recalls.

Then, at the end of June, “The Mill River Recluse” got a mention on a site called Ereader News Today, which posts tips for Kindle readers. Over the next two days, it sold another 600 copies. Ms. Chan realized she might be able to drive sales herself. She spent about $1,000 on marketing, buying banner ads on websites and blogs devoted to Kindle readers and a promotional spot on goodreads.com, a book-recommendation site with more than six million members.

After learning that self-published authors can pay to have their books reviewed by some sites, she paid $35 for a review from IndieReader.com (IndieReader no longer offers paid reviews). She paid $575 for an expedited review from Kirkus Reviews, a respected book-review journal and website. The review service, which Kirkus launched in 2005, gives self-published authors the option to keep the review private if it’s negative. Ms. Chan decided to have hers posted on their website. Kirkus called the novel “a comforting book about the random acts of kindness that hold communities together.” She used blurbs from the reviews on her Amazon and Barnes & Noble pages. “I hoped it would lend some credibility,” she says. “Most other reviewers won’t touch it.”

Sales kept climbing. In July, it sold more than 14,000 copies. That month, it was featured on two of the biggest sites for e-book readers, generating a surge of new sales. In August, it sold more than 77,000 copies and hit the New York Times and USA Today e-book best-seller lists; it later landed on the Wall Street Journal list. In September, it sold more than 159,000 copies. To date, she has sold around 413,000 copies.

Ms. Chan and her agent decided to resubmit the novel to all the major imprints, citing robust sales figures and rave online reviews. Some publishers have responded warily. A representative of one publishing house feared the book had “run its course,” Ms. Liss recalls. Others worried about the novel’s bargain basement price, arguing that an e-book that sells for 99 cents likely won’t command a typical hardcover price of around $26.

A few major publishers made offers, but none matched the digital royalty rates of 35% to 40% that Ms. Chan makes on her own through Amazon and Barnes & Noble. Typically, most publishers offer print royalties of 10% to 15% and digital royalties of 25%. Simon & Schuster offered to act as a distributor, but Ms. Chan wants the book to be professionally edited and marketed.

Ms. Liss says that the offers from U.S. publishers so far don’t improve much on what Ms. Chan is making on her own. She’s made around $130,000 before taxes—substantially more than a standard advance for the average debut novelist—and she’s getting a steady stream of royalties every month. “I told Darcie, at this point you’re printing money. They’re not. Go with God, we’ll sell the second book,” Ms. Liss says.

In the meantime, there’s interest from other corners of the industry. Multiple audio-book publishers have made offers. Six film studios have inquired about movie rights. Two foreign publishers bid on the book. Ms. Chan is holding off on such deals, for fear they might sabotage a potential contract with a domestic publisher.

Ms. Chan still wants to see her book in print. Several librarians have contacted her seeking print copies after patrons requested her book. “I have people writing me begging me for a hard copy, book clubs and libraries calling me, and I don’t have a hard copy to provide for them,” she says.

Ms. Liss advised her to work on a sequel set in the same town, with some of the same characters. Ms. Chan has written two chapters. While she would love to write full time, for now, she still sees writing as more of a hobby. When people ask her what she does for a living, she says she’s a lawyer. But she’s still holding out hope that a publisher will buy “The Mill River Recluse,” edit it and sell it in brick-and-mortar stores.

“The hardest part for me is uncertainty,” she says. “I deal better with rejection than uncertainty.”

Write to Alexandra Alter at alexandra.alter@wsj.com

By BEN LEVISOHN

Many investors, looking for better returns and a little safety, are loading up on corporate bonds, which have been far steadier than stocks during the market storms of the past few years.

But corporate bonds are getting less safe by the day.

A change in the way corporate bonds are traded is resulting in murkier prices, more volatility and less differentiation among individual bonds. The result: Experts say investors should expect more risk and potentially less return from such bonds in the future, and rethink how they assemble their entire bond portfolios.

The good news? Once investors understand how the corporate-bond market is changing, they can make educated decisions about which kinds of investments—mutual funds, exchange-traded funds or individual bonds—make the most sense, given their investing goals.

“The changes will ultimately hurt the small investor,” says Howard Simons, strategist at Bianco Research. “The only thing you can do is be aware of how risk has shifted and act accordingly.”

It is easy to be complacent about an investment when it is surging. A broad rally in Treasury securities is pushing up prices of all manner of other bonds. After a strong 2011, relatively safe corporate bonds rated “investment grade” by the bond-rating firms have returned 1.9% this year—their best annual start since 2001. Riskier high-yield, or “junk,” bonds have returned 4.1%. This, after three decades of steadily rising bond prices—among the longest bull markets for bonds in history.

Since the Federal Reserve’s announcement late last month that it expects to keep interest rates low through 2014, investors have stepped up their buying even more. During the week ended Feb. 1, investors poured $7.5 billion into bond mutual funds, the most since data firm EPFR Global began tracking such investments in 2002.

Most advisers recommend that investors hold a broad mix of Treasurys and corporate bonds. But while the Treasury market continues to be the biggest and deepest investment market in the world, corporate bonds are becoming less predictable, even for the pros.

Banks Step Back

At the heart of the shift is the declining role of banks, which historically have been big corporate bond dealers, keeping vast reserves of bonds on their books and matching buyers and sellers. Experts say new regulations, including the Dodd-Frank Act, the so-called Volcker rule, which bans banks from trading for their own account, and Basel III, which governs banks internationally, have forced banks to be more selective about what they hold.

All told, banks hold about $45 billion in corporate bonds with maturities over one year, versus about $215 billion at the beginning of 2008, according to Barclays Capital.

Mutual funds, exchange-traded funds and other investors are filling the void. Investment-grade and high-yield corporate-bond funds have doubled in size since the beginning of 2008, to $1.2 trillion and almost $250 billion, respectively, according to Barclays. In the $1 trillion high-yield bond market, ETFs now account for about 3% of the market, up from virtually nothing four years ago.

As the steadying influence of banks wanes, the bond market is more vulnerable to swings in investor sentiment, experts say.

Prices today are being driven more by the whims of investors buying and selling funds and ETFs and less by the fundamentals of the bonds themselves, says Mr. Simons of Bianco Research. Investment-grade bonds have seen their volatility nearly triple during the past three years, compared with the three years before the financial crisis, according to Barclays Capital. High-yield bonds are more than twice as volatile.

The result is bigger opportunities for gains when the market goes up—but a bigger chance of losses when the market tanks, says David Sherman, principal at Cohanzick Management and portfolio manager of the RiverPark Short-Term High-Yield fund.

Murkier Prices

Making matters trickier for investors, bond prices are artificially high because of the Fed’s recent rounds of Treasury purchases, which have pushed up the prices of most other bonds as investors seek higher yields. That makes traditional investment gauges less useful.

Consider the debate about whether junk bonds are a good investment now. One way managers value bonds is to look at the difference between their yields and those of Treasurys. When the gap is wider than the historical average, many managers say corporate bonds represent a good value. That seems to be the case now: The “spread” between high-yield corporate bonds and Treasurys is about 6.4 percentage points, above the 15-year average of 6.

Not so fast, others say. Because Treasury rates are artificially low, it is better to use the actual yield of the high-yield bond index, which currently is 7.3%, far below the 15-year average of 10%.

On that basis, the skeptics say, the bond yields aren’t enough to compensate investors for the risks they are taking.

If you aren’t sure you can value a bond, “you don’t want to get involved,” says Stephen Antczak, head of U.S. credit strategy at Citigroup.

Trouble for Funds

The changes in the market are forcing mutual-fund managers to rethink their strategies in ways that could dent returns and increase risk for investors.

Funds are required to allow shareholders to buy new shares or withdraw all of their cash every trading day. But the increased volatility is forcing managers to be more careful with their portfolios.

“Investors pulling out a lot of money in a hurry can upend an investment strategy and force you to sell things you don’t necessarily want to sell,” says Eric Jacobson, director of fixed-income research at Morningstar.

Many managers are choosing to hold more “liquid” bonds, which can be sold at a moment’s notice. Bob Brown, president of the bond group at Fidelity Investments, says the firm now looks only for highly liquid securities. Eaton Vance has reduced the amount of hard-to-sell securities it owns in its portfolios.

The problem is that liquid bonds typically are more volatile than illiquid ones because they trade more frequently. The Barclays Very Liquid High Yield Bond Index is 25% more volatile than the Barclays High-Yield Bond index, which contains a mixture of liquid and less-liquid securities.

The price for liquidity, in other words, is more violent swings.

Some managers are boosting their cash holdings, which can reduce returns, so that they will have enough money on hand to meet redemptions quickly if the market drops and investors start selling. The Eaton Vance Income Fund of Boston, for example, now holds about 5% to 6% of its portfolio in cash, versus 2% before the financial crisis.

“Do you hold more cash, more liquid bonds or some balance of those two?” asks Jeff Meli, a strategist at Barclays Capital.

Playing the Market

So what is an individual investor to do?

Experts say people who can afford to do so should stick with individual bonds. Typically corporate bonds have a face value of $1,000, but investors should plan on buying blocks of at least $20,000 to avoid getting hit hard by commissions. Advisers generally recommend investors buy bonds from at least 20 different issuers, for diversification.

Since most investors buy bonds for income and plan to hold them to maturity, they don’t have to worry as much about the market’s volatility or increased correlation. They also can buy cheaper illiquid bonds that fund managers avoid.

There are downsides, however. Institutions tend to get better prices for big blocks of bonds than small investors can get for smaller blocks. Investors should check the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine website, known as Trace, to find recent prices. And these days, getting your hands on bonds with decent yields isn’t easy, because investors are holding on to them rather than selling them for profit, says Marilyn Cohen, president of Envision Capital Management in Los Angeles.

Experts suggest investors look for companies with good cash flows and improving profitability. Ms. Cohen recommends three that she says fit the bill: a high-yield bond issued by auto-parts maker American Axle that matures in 2017 and has a 6.33% yield. She also likes a high-yield issue by energy-company Chesapeake Energy maturing in 2020 with a 6.38% yield, and an investment-grade bond from auto-parts maker BorgWarner that matures in 2020 and yields 3.51%. (Investment-grade bonds carry ratings of triple-B or higher from Standard & Poor’s and Fitch Ratings and Baa or higher from Moody’s; high-yield bonds have lower ratings.)

Fund Choices

Many investors can’t afford individual bonds or don’t have access to them in 401(k) accounts. For them, funds and ETFs are the only alternative.

They, like professional fund managers, must decide whether to look for more liquidity or less, and more cash or less.

Such investors should think about what they are trying to achieve with their bond holdings. For instance, an investor who wants exposure to the entire asset class should choose a fund or ETF with a low expense ratio and little cash, says Warren Ward of financial-advisory firm Warren Ward Associates.

“We choose from the lowest-cost funds available,” he says. “And we prefer to make the cash decision ourselves.”

Michael Gibney, an adviser at Highland Financial Advisors in Riverdale, N.J., recommends holding a large fund like the $16.2 billion Vanguard Intermediate-Term Investment Grade fund, a portfolio of 1,218 bonds that carries an expense ratio of 0.22%.

Sarah Bush, a senior fund analyst at Morningstar, suggests the $15.6 billion Vanguard High-Yield Corporate fund, which has an expense ratio of 0.25% and has just 1.6% in cash.

Other options include the $18.7 billion iBoxx Investment-Grade Corporate Bond ETF, which has an expense ratio of 0.15%, and the $13.4 billion iShares iBoxx High-Yield Corporate Bond ETF, which charges 0.5% in fees.

Sam Katzman, chief investment officer at Constellation Wealth Advisors in New York, prefers “go-anywhere” funds that have wider latitude in the types of bonds they buy and the amount of cash they hold. Such funds are for investors who prefer their manager make decisions about whether they think the bond market looks rich or cheap and act accordingly.

Mr. Katzman likes the $60 billion Templeton Global Bond fund, which owns international bonds and currencies as well as U.S. corporate bonds, and has an expense ratio of 0.88%.

Not everyone thinks cash is bad. Gregory Lavine, an adviser at Altfest Personal Wealth Management in New York, says he isn’t concerned by managers holding some when better opportunities are unavailable. One of his choices: the Loomis Sayles Bond fund, which has about 11% in cash and an expense ratio of 0.63%.

Cash doesn’t have to subtract too much from performance. The ING Pimco High-Yield Portfolio has an 8.7% cash stake, well above the category average of 5.9%, yet has been in the top 25% of high yield funds during the past one and three years, according to Morningstar.

Says Mr. Lavine: “It’s better to hold cash than invest poorly.”

By IANTHE JEANNE DUGAN

The government is expanding a massive safety net to help the unemployed buy health insurance, but millions of people can’t access the aid because of the way the program was designed.

As a cornerstone of the economic stimulus plan, the administration of President Barack Obama allocated $25 billion to pay 65% of health-insurance premiums for workers laid off this year. Earlier this month, Congress extended the program for people laid off through February 2010 and expanded the aid to 15 months from nine.

But the program is eluding many people in need. That is because it is tied to the narrow parameters of Cobra, the Consolidated Omnibus Budget Reconciliation Act of 1985, which President Ronald Reagan signed into law to help people cope during layoffs.

Cobra requires companies with more than 20 employees that already offer group health insurance to continue the insurance for former employees for up to 18 months. But insurance costs under Cobra have gotten so expensive that many people can’t afford even their unsubsidized 35% portion. Meanwhile, millions of workers don’t qualify for Cobra in the first place, because the law doesn’t cover the self-employed or those working for companies that abruptly shut down or are too small, or those who didn’t offer health insurance to begin with. The subsidy also is off-limits to individuals who have been unemployed the longest; only those laid off since October 2008 are eligible.

Despite the gaps, the administration says the program is helping. “This is a vast improvement over what was in place before when there were no subsidies at all,” says Jason Furman, deputy assistant to President Obama for economic policy. “But this is not the president’s long-term health reform — this is a short-term response to a major economic crisis.”

The Cobra subsidy is part of the nation’s uneven unemployment safety net. Like unemployment checks, retraining and other benefits, which vary wildly depending on factors such as geography, the Cobra subsidy has created a lopsided system of haves and have-nots.

When Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., filed for bankruptcy protection in August, about 2,000 former workers couldn’t get U.S. help buying health insurance because the company shut down the health plan.

“Why should I be left out of this government safety net just because I worked for a company that closed?” asks Susan Pascuma, a former insurance coordinator at Taylor Bean who now is without insurance.

Her unemployment check was about $1,200 per month. After paying $800 in rent, she says, she couldn’t the afford private insurance of $1,000 per month, the lowest rate she says she found.

A week after her company shut down the health plan, the 39-year-old single mother of three went to the emergency room with pain from multiple gallstones. She was given medication and sent home; doctors wouldn’t operate, she says, because she lacked health insurance. She later found a doctor who has agreed to operate for free.

She recently started working for a maker of air compressor parts on New York’s Long Island, but won’t qualify for the company’s insurance plan for six months. She intends to buy coverage privately.

David Dantzler, a Taylor Bean lawyer, says the lender didn’t have access to funds to keep its insurance plan going. He agrees that it “is terribly unfair” that employees don’t qualify for U.S. help.

Similar situations abound. Through September, 45,510 businesses filed for bankruptcy — more than in all of 2008 — according to the nonpartisan American Bankruptcy Institute.

The Cobra-linked subsidy also is proving elusive for people who are eligible but don’t have the means to pay for it.

Cynthia Parras decided not to enroll in Cobra after she was laid off from her job as a financial-services product manager in San Francisco in February, because she felt she couldn’t afford it. Over the summer, she was diagnosed with shingles. The infection moved to her eyes, and doctors told her she could lose her sight without treatment. She paid about $2,500 out of pocket. To help compensate, she skipped her mortgage payment last month, and signed up for a state insurance plan for welfare recipients.

“This is scary and degrading,” she says. “I never have been without insurance, and never in a million years thought this would happen to me.”

Ms. Parras is starting a new job next month as an account manager at an Internet company, but the position doesn’t offer health insurance, and she plans to buy it on her own.

Government officials initially estimated that some seven million people would be helped by the subsidy. But only half have tapped the subsidy program, estimates Ceridian Benefits Services, the nation’s largest Cobra administrator. In a survey of 50,000 businesses released in October, Ceridian said 17.7% of former employees enrolled in Cobra, up from 12.4% last year before the subsidy was introduced.

Mr. Furman says the government isn’t sure yet how many people signed up, because the data are incomplete and lagging. “Our belief is that very substantial numbers of people have enrolled,” he says.

When the Cobra law was passed in the 1980s, it seemed like a win for both corporations and their employees. Workers would benefit from access to health plans even in the event of a layoff, while companies would be able to pass along 100% of the insurance cost to former employees, plus a 2% fee.

But as the costs rose, more healthy people shunned Cobra, leaving a disproportionately large number of sick former employees enrolled in company plans. As a result, insurers raised rates, driving up companies’ employer insurance costs overall, including the bills of remaining employees.

Meanwhile, individual health premiums have skyrocketed. The average monthly Cobra bill for family health coverage has surged to 83% of the average monthly unemployment-insurance check, up from about 61% in 2001, according to Families USA, a nonprofit group focusing on health-care issues.

“The situation has gotten enormously worse because health-care costs have risen considerably faster than wages,” says Ron Pollack, executive director of Families USA, which has been a proponent of the health-care overhaul.

Opponents of the Obama administration’s drive to overhaul health care also have criticized Cobra. Michael Cannon, the director of health policy studies at the Cato Institute, a free-market think tank, says the Cobra requirement encourages some companies to stop offering health insurance or slow their hiring. The subsidy, he says, is “another band-aid on a band-aid that didn’t solve the problem.”

Cobra eventually could become obsolete under the health-care overhaul. Under the bills passed by the House and the Senate, most Americans would be required to purchase health insurance, with the government providing tax credits to subsidize the cost to low- and middle-income Americans. But since that provision wouldn’t kick in until 2014, Cobra likely would remain a critical part of the system until then.

The government subsidy amounts to $325 a month on average for an individual and $715 for a family, according to government estimates. Jobless individuals pay their former employers 35% of the premium, and the employer recoups the rest through a refund in payroll taxes.

Erin Nelson, 47, faced $700 monthly Cobra payments after being laid off from a nonprofit in March. Her employer was small, so she wasn’t eligible for the subsidy until July, after California passed a mini-Cobra law aimed at businesses with fewer than 20 employees. In the meantime, she says she paid $1,200 out of pocket for an ultrasound to investigate a pain behind her rib. She put off a routine mammogram and pap smear.

There also has been some confusion at some companies over who is covered under Cobra. People eligible for Medicare or a spouse’s insurance can’t get the subsidy, nor can workers who have left voluntarily.

The Labor Department says it has received more than 11,000 complaints this year from former workers denied the subsidy by employers. The government overturned 70% of the denials, a spokesman says.

Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com

Printed in The Wall Street Journal, page A14

GameStop has paid off all its debt, so it’s going to start paying investors. The world’s largest multichannel video-game retailer Wednesday voted a first-ever quarterly common dividend—15 cents a share. That will cost about $82 million annually and give the shares a current yield of 2.6%.

Traded on the Big Board, the stock (ticker: GME) was recently quoted within five points of its 52-week high of $28.66. GameStop has repurchased more than $1 billion worth of its shares since launching a capital-allocation plan in January 2010.

BB&T Capital Markets reiterated its Buy rating on GameStop in mid-January, saying that there is “a lot to like about the year ahead.”

Despite the videogame industry’s weak finish to 2011, the firm believes that the coming introductions of the Sony Vita hand-held device, the Nintendo Wii U console and the long-awaited gameGrand Theft Auto V“will drive improved industry fundamentals in 2012.” BB&T adds that the buying and selling of used iPods, iPhones and iPads “could drive significant incremental earnings for GameStop.”

ValuEngine, in a Feb. 7 research report, concurred, saying GameStop “exhibits [an] attractive P/E ratio, market valuation and company size.” Standard & Poor’s opinion also is Buy.

AMUSEMENT-PARK operator Six Flags Entertainment was among the 2011 picks of Barron’s Roundtable veteran Meryl Witmer. The stock was a dandy, climbing 50% on the year. And the beat goes on.

Wednesday, Six Flags (SIX) boosted its quarterly common dividend by tenfold, to 60 cents a share from six cents. That makes for a 5.1% yield. The move will put close to $120 million in additional cash in shareholders’ pockets yearly. Dividends, initiated in December 2010 at three cents a share, doubled last August.

The NYSE-listed stock surged last week to a 52-week high of $47.29, putting it ahead 15% year to date. Last month, the company enriched its share-buyback program by $250 million through 2015.

Heavy debt and declining attendance sent Six Flags into Chapter 11 bankruptcy in June 2009, from which it emerged in May 2010. Strenuous cost-cutting countered the attendance problem, and Six Flags scored a 44% gain in net in 2011′s third quarter. Full-year results will be posted this week.

DOW JONES INDUSTRIALS component 3M (MMM) enhanced its quarterly common dividend Tuesday for the 54th straight year. The 110-year-old company’s new payout, which is worth an extra $111 million annually, will be 59 cents a share, up 7% from 55 cents. Yield: 2.7%.

3M has returned over $7 billion to investors via dividends over the past five years. Payouts have been ongoing without interruption since 1916. 3M has a $7 billion stock-buyback program in place. The shares trade some 10 points under their 52-week high of $98.19.

The conglomerate’s product roster includes thousands of items, including Post-it notes and Scotch cellophane tapes. Inge Thulin, who will assume the post of 3M CEO Feb. 24, replacing George Buckley, had a simple explanation for the company’s decision: “We are in good shape.”

ON JAN. 16, this column noted that one of the consumer-discretionary stocks that Goldman Sachs found attractive was Wyndham Worldwide (WYN). Well, Wednesday, the hotel and resort manager boosted its quarterly common dividend 53%, to 23 cents a share from 15 cents. That will add some $50 million to Wyndham’s dividend annually and produces a 2.1% yield. The shares, which trade on the Big Board, promptly set a 52-week high of $44.66. This is Wyndham’s third annual consecutive boost. Payouts began in August 2007.

JPMorgan also likes Wyndham, noting in a recent research report that the company continues to beat Wall Street earnings estimates. “Wyndham remains a top lodging pick for us, given these attractive characteristics: resiliency within its hospitality businesses, prudent free-cash-flow deployment into buybacks and dividends, and low absolute/relative EV/Ebitda valuation [enterprise value/earnings before interest, taxes, depreciation and amortization], in our view.”

Full-year 2011 net and revenue each advanced 10% from 2010 levels. Free cash flow climbed 25%, to $754 million. In 2011, Wyndham spent $902 million to buy back 28.7 million of its shares. 

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shirley.lazo@barrons.com