Investing to earn 4 to 8 percent or more
To earn up to an 8-percent yield in a world where safe investments pay 1 percent or less requires accepting significant risk. But if you really want or need to boost return and are willing to take some risks to do so, read on.
Many of today’s best bets for high yields — master limited partnerships (MLPs), mortgage-owning real estate investment trusts, and business development companies — trade on exchanges like stocks, putting you in the often gut-churning position of watching their share prices whip around like a roller coaster.
But there are also strong dividend-paying stocks and high-yield municipal bonds that more conservative investors might want to consider.
Master limited partnerships
Becca Followill, head of stock research at U.S. Capital Advisors, thinks MLPs are a great idea for superior income. Her favorite is Targa Resources Partners (symbol NGLS; recent price, $46; yield, 6.0 percent).
Morningstar analyst Steven Pikelny likes four closed-end funds offered by BlackRock: BlackRock Corporate High Yield (COY; $8; 7.6 percent); BlackRock Corporate High Yield III (CYE; $8; 7.9 percent); BlackRock Corporate High Yield V (HYV; $13; 8.2 percent); and BlackRock Corporate High Yield VI (HYT; $13; 8.1 percent).
All invest in “junk” bonds and take on a moderate amount of debt to boost their payouts, and all recently traded at close to net asset value. Pikelny suggests buying the one trading at the biggest discount to NAV (or at the smallest premium).
He also favors AllianceBernstein Global High Income (AWF; $16; 7.7 percent). Top holdings of this fund include bonds issued by Brazil and Argentina, but more than 70 percent of assets are in corporate junk bonds.
Speaking of junk bonds, a key benchmark fund, the Bank of America Merrill Lynch High Yield Master II index, currently yields 5.9 percent.
Wells Fargo Advantage High Income (STHYX; 4.0 percent) yields less because of expenses and because it is more conservatively managed than many junk funds. Still, High Income beat its typical peer over the past three years, with a 10.3-percent annualized return — and it did so with less volatility.
The biggest junk-bond ETF is iShares iBoxx $ High Yield Corporate Bond (HYG;, 4.9 percent). It charges annual fees of 0.50 percent.
Municipal bond funds
If you’re in a high tax bracket, consider a closed-end fund that owns municipal bonds. Nearly all such funds use borrowed money to boost income.
One that doesn’t is Nuveen Municipal Value Fund (NUV; $10; 4.4 percent), which mostly buys high-quality, long-term bonds. Although at first glance the fund’s yield seems to disqualify it from this group, you really need to look at its taxable-equivalent yield — what someone would have to earn from a taxable bond to equal the yield of a tax-free bond.
In this case, 4.4 percent is the equivalent of a 6.1-percent taxable yield for someone in the 28-percent federal tax bracket and 7.7 percent for an investor in the top 39.6-percent bracket, who also faces the new 3.8-percent Medicare surtax on investment income.
For those who can stand more risk, UBS analyst Sangeeta Marfatia favors BlackRock MuniYield Quality (MQY; $17; 5.7 percent), which also buys long-term, high-grade munis. But unlike the Nuveen fund, this one uses borrowed money to boost income. A 5.7-percent tax-free yield is equivalent to 7.9 percent taxable for someone in the 28-percent bracket and 10.0 percent for a top-bracket investor.
If you want more diversification, check out PowerShares CEF Income Composite (PCEF; $26; 7.4 percent). It’s an exchange-traded fund that owns dozens of taxable, income-producing closed-end funds. Most of its holdings borrow money, though the ETF itself does not.
Dividend-paying stocks
Normally, to get even 4 to 6 percent yields, you have to take on a fair amount of risk. But in the case of dividend-paying stocks, that may not always be the case.
Some high-yielders, such as AT&T (symbol T; recent price, $38; yield, 4.7 percent), Verizon Communications (VZ; $50; 4.1 percent) and Intel (INTC; $21; 4.2 percent), are financially strong companies that have the wherewithal to sustain their payouts.
Jason Brady, of Thornburg Investment Management, favors telecom companies because of the rapid growth of smart phones. One of his favorites is Telstra (TLSYY; $24; 6.0 percent), a leading Australian provider.
We took a page from his book: iShares International Select Dividend ETF (IDV; 5.2 percent) tracks an index that includes 100 high-yielding stocks in developed foreign markets.
Preferred shares
Preferred shares are stock-bond hybrids. They pay a fixed, regular dividend like bonds, but the shares trade like stocks. Preferreds suffered terribly during the 2008 financial crisis, but they’ve recovered strongly since then.
One ETF, iShares S&P U.S. Preferred Stock (PFF; 5.6 percent), holds 75 percent of its portfolio in banks, insurance and diversified financial-services companies.
Bonds in developing countries are paying yields of more than 4 percent these days. T. Rowe Price Emerging Bonds (PREMX; 4.3 percent) and Fidelity New Markets Income (FNMIX, 4.3 percent) hew closely to a JPMorgan emerging-markets bond index. Aberdeen Asia-Pacific Income (FAX; 5.4 percent), a closed-end fund, focuses on Australian and Asian debt.
Real estate investment trusts
Finally, real estate: Health Care REIT (HCN; $70; 4.4 percent), a real estate investment trust, and CBRE Clarion Global Real Estate Income (IGR; $10; 5.7 percent), a closed-end fund, offer exposure to two growing areas of the sector.
The growth catalyst behind HCN is the firm’s senior-living communities. CBRE is a real estate firm whose assets are mostly invested in North America (59 percent), but which has a chunk across Asia (29 percent), making it a good bet for cashing in on rising consumer wealth in that region. The fund recently traded at a 4-percent discount to net asset value.
Nellie S. Huang is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit www.Kiplinger.com.
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