Feb. 6, 2012 10:57 PM |
Photograph by Stephen Schauer/Getty Images
In the pre-crisis days of late 2007, picking up a 5 percent yield was as easy as parking cash in a FDIC-insured six-month certificate of deposit. No muss, no fuss, no risk. Today that CD delivers a barely-there 0.53 percent yield. Now, in fact, there’s no way to earn close to 5 percent if you’re glued to a flight-to-safety approach. Stretching all the way out to a 30-year Treasury only gets you 3 percent.
Five percent isn’t a yield of unachievable dreams, though. “You just have to be imaginative,” says Brian McMahon, co-manager of the $9.7 billion Thornburg Investment Income Builder Fund, which sports a 6.3 percent dividend yield.
The classic spots for equity-yield seekers—U.S. utilities and real estate investment trusts—no longer pay off as reliably as they used to. In last year’s long flight to quality, valuations in the slow-growth utility sector got pushed above historic norms, and the average equity REIT yield these days is less than 4 percent.
Enriching your yield
Photograph by Jane Yeomans/Gallerystock.com
All high-yielding securities come packing more volatility than CDs. That said, earning 0.53 percent, or the 1.9 percent in a 10-year Treasury, carries its own risks: falling short of inflation running at 3 percent. Marilyn Cohen, founder of Envision Capital Management, which manages fixed-income portfolios for individual investors, suggests maintaining a high-grade portfolio for the bulk of your bond assets and limiting a stake in higher-yielding alternative niches of the bond market to 20 percent or so of your fixed-income portfolio. That delivers a yield boost without undermining the main purpose of most bond portfolios: tamping risk.
The same side-dish approach to higher-yielding investments applies to the stock portion of your portfolio as well, adds Cohen, so that you don’t upend a well-reasoned asset allocation strategy.
Collecting junk
You pick up an 8 percent average yield these days trawling among below-investment grade U.S. corporate bond issues. Of course, junk is highly sensitive to economic headwinds; at the first whiff of a recession they can tumble like a stock. But Tim Clift, chief investment strategist at Envestnet, says now is a smart time to consider junk.
Photograph by Jane Yeomans/Gallerystock.com
“With a slowly improving economy and corporate default rates that keep falling, the risk tradeoff is worthwhile.” He recommends the $11.7 billion iShares iBoxx High Yield Corporate Bond ETF (7.3 percent yield, 0.50 percent expense ratio) because of its high liquidity.
Loomis Sales Bond fund (5.4 percent yield, $2,500 minimum initial investment; 0.92 percent expense ratio) is another way to get some high yield exposure. Cohen at Envision Capital Management is a fan of the long-run success of this go-anywhere bond fund. About 30 percent of the $19.4 billion fund’s assets are in below-investment grade bonds.
Mortgage security mix
Marilyn Cohen notes that trading and researching securitized mortgage issues requires bucketloads of money and analytical firepower to ferret out the values from the dross. Her recommendation is to hire Jeffrey Gundlach, manager of Doubleline Total Return fund (7.9 percent yield, $2,000 minimum, 0.74 percent expense ratio) to do the heavy lifting.
The fund has only been around since early 2010, but Gundlach distinguished himself running the TCW Total Return fund for more than a decade before launching his own fund shop. “Going through these issues is like reading Greek,” says Cohen. “But Doubleline clearly knows how to read Greek.” The fund is up near 15 percent since its April 2010 launch, about double the return for the Barclays U.S. Aggregate Bond Index.
Nearly 85 percent of Gundlach’s $15.2 billion fund is in mortgage-backed securities, with an average weighted coupon of 5.7 percent. He has recently positioned the portfolio away from mortgage-backed securities that would be hardest hit in the event of a new wave of mortgage refinancing.
Durable stock yields
Thornburg manager McMahon says global telecoms such as Australia’s Telstra (7.7 percent yield) and the U.K.’s Vodafone (7.4 percent yield ), as well as energy stalwarts including Total (5.8 percent yield) offer above-market dividend payouts at reasonable valuations. For ETF investors, Clift recommends the SPDR S&P International Dividend ETF (6.5 percent yield, 0.45 percent expense ratio). It has more than 25 percent of assets in telecoms, nearly triple the average for foreign value ETFs tracked by Morningstar.
The ETF aims to track an S&P index that seeks out the 100 highest global yielders that also pass a screen for dividend stability. Over the past 3 years the ETF’s annualized 23 percent gain bests the 18 percent average rise for international value ETFs. “If you expect flat or slow growth and no more downside in Europe, you have to worry less about volatility, and in the meantime you get that high dividend,” says Clift.
Milking MLPs
Photograph by Matthew Staver/Bloomberg
With yields of 5 percent plus, MLPs, which are invested in the pipes and transportation systems that move gas, oil and natural gas around, have become increasingly popular among yield seekers. The JP Morgan Alerian MLP ETN, launched less than three years ago, has $3.7 billion in assets. “The lottery is over in terms of MLPs being undervalued,” says Pat Dorsey, director of research and strategy at Sanibel Captiva Investment Advisers. “But you can get a solid distribution (yield) and the prospect of distribution increases.”
Sanibel Captiva runs an alternative income portfolio for clients seeking extra yield; about half the fund is invested in MLPs including AmeriGas Partners (6.8 percent yield) and Boardwalk Pipeline Partners (7.6 percent yield). Direct investment in MLPs through a taxable account necessitates having a good accountant, as tax reporting is done through a K-1 filing.
Turning to TruPS
This TruPS segment of the preferred stock universe has yields above 6 percent. As with all preferreds, you have to be comfortable with this being pretty much a financial-sector play. Dorsey notes that with TruPS your only real bet is that the bank will survive, as the goal is to pocket the yield; capital appreciation isn’t really part of the equation.
TruPS have been a popular way for banks to raise money, and the value of the issues were counted as bank capital. The Dodd-Frank financial reform bill excludes TruPS from being counted as Tier 1 capital, however. The regulation will be phased in between 2013-2016. The expectation is that most issuers will call their preferreds between now and 2016. All calls will be at par—typically that’s $25 a share–so the trick now is to only purchase securities trading below par.
(Carla Fried is a writer based in California.)
To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net
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Photograph by Stephen Schauer/Getty Images
In the pre-crisis days of late 2007, picking up a 5 percent yield was as easy as parking cash in a FDIC-insured six-month certificate of deposit. No muss, no fuss, no risk. Today that CD delivers a barely-there 0.53 percent yield. Now, in fact, there’s no way to earn close to 5 percent if you’re glued to a flight-to-safety approach. Stretching all the way out to a 30-year Treasury only gets you 3 percent.
Five percent isn’t a yield of unachievable dreams, though. “You just have to be imaginative,” says Brian McMahon, co-manager of the $9.7 billion Thornburg Investment Income Builder Fund, which sports a 6.3 percent dividend yield.
The classic spots for equity-yield seekers—U.S. utilities and real estate investment trusts—no longer pay off as reliably as they used to. In last year’s long flight to quality, valuations in the slow-growth utility sector got pushed above historic norms, and the average equity REIT yield these days is less than 4 percent.
Enriching your yield
Photograph by Jane Yeomans/Gallerystock.com
All high-yielding securities come packing more volatility than CDs. That said, earning 0.53 percent, or the 1.9 percent in a 10-year Treasury, carries its own risks: falling short of inflation running at 3 percent. Marilyn Cohen, founder of Envision Capital Management, which manages fixed-income portfolios for individual investors, suggests maintaining a high-grade portfolio for the bulk of your bond assets and limiting a stake in higher-yielding alternative niches of the bond market to 20 percent or so of your fixed-income portfolio. That delivers a yield boost without undermining the main purpose of most bond portfolios: tamping risk.
The same side-dish approach to higher-yielding investments applies to the stock portion of your portfolio as well, adds Cohen, so that you don’t upend a well-reasoned asset allocation strategy.
Collecting junk
You pick up an 8 percent average yield these days trawling among below-investment grade U.S. corporate bond issues. Of course, junk is highly sensitive to economic headwinds; at the first whiff of a recession they can tumble like a stock. But Tim Clift, chief investment strategist at Envestnet, says now is a smart time to consider junk.
Photograph by Jane Yeomans/Gallerystock.com
“With a slowly improving economy and corporate default rates that keep falling, the risk tradeoff is worthwhile.” He recommends the $11.7 billion iShares iBoxx High Yield Corporate Bond ETF (7.3 percent yield, 0.50 percent expense ratio) because of its high liquidity.
Loomis Sales Bond fund (5.4 percent yield, $2,500 minimum initial investment; 0.92 percent expense ratio) is another way to get some high yield exposure. Cohen at Envision Capital Management is a fan of the long-run success of this go-anywhere bond fund. About 30 percent of the $19.4 billion fund’s assets are in below-investment grade bonds.
Mortgage security mix
Marilyn Cohen notes that trading and researching securitized mortgage issues requires bucketloads of money and analytical firepower to ferret out the values from the dross. Her recommendation is to hire Jeffrey Gundlach, manager of Doubleline Total Return fund (7.9 percent yield, $2,000 minimum, 0.74 percent expense ratio) to do the heavy lifting.
The fund has only been around since early 2010, but Gundlach distinguished himself running the TCW Total Return fund for more than a decade before launching his own fund shop. “Going through these issues is like reading Greek,” says Cohen. “But Doubleline clearly knows how to read Greek.” The fund is up near 15 percent since its April 2010 launch, about double the return for the Barclays U.S. Aggregate Bond Index.
Nearly 85 percent of Gundlach’s $15.2 billion fund is in mortgage-backed securities, with an average weighted coupon of 5.7 percent. He has recently positioned the portfolio away from mortgage-backed securities that would be hardest hit in the event of a new wave of mortgage refinancing.
Durable stock yields
Thornburg manager McMahon says global telecoms such as Australia’s Telstra (7.7 percent yield) and the U.K.’s Vodafone (7.4 percent yield ), as well as energy stalwarts including Total (5.8 percent yield) offer above-market dividend payouts at reasonable valuations. For ETF investors, Clift recommends the SPDR S&P International Dividend ETF (6.5 percent yield, 0.45 percent expense ratio). It has more than 25 percent of assets in telecoms, nearly triple the average for foreign value ETFs tracked by Morningstar.
The ETF aims to track an S&P index that seeks out the 100 highest global yielders that also pass a screen for dividend stability. Over the past 3 years the ETF’s annualized 23 percent gain bests the 18 percent average rise for international value ETFs. “If you expect flat or slow growth and no more downside in Europe, you have to worry less about volatility, and in the meantime you get that high dividend,” says Clift.
Milking MLPs
Photograph by Matthew Staver/Bloomberg
With yields of 5 percent plus, MLPs, which are invested in the pipes and transportation systems that move gas, oil and natural gas around, have become increasingly popular among yield seekers. The JP Morgan Alerian MLP ETN, launched less than three years ago, has $3.7 billion in assets. “The lottery is over in terms of MLPs being undervalued,” says Pat Dorsey, director of research and strategy at Sanibel Captiva Investment Advisers. “But you can get a solid distribution (yield) and the prospect of distribution increases.”
Sanibel Captiva runs an alternative income portfolio for clients seeking extra yield; about half the fund is invested in MLPs including AmeriGas Partners (6.8 percent yield) and Boardwalk Pipeline Partners (7.6 percent yield). Direct investment in MLPs through a taxable account necessitates having a good accountant, as tax reporting is done through a K-1 filing.
Turning to TruPS
This TruPS segment of the preferred stock universe has yields above 6 percent. As with all preferreds, you have to be comfortable with this being pretty much a financial-sector play. Dorsey notes that with TruPS your only real bet is that the bank will survive, as the goal is to pocket the yield; capital appreciation isn’t really part of the equation.
TruPS have been a popular way for banks to raise money, and the value of the issues were counted as bank capital. The Dodd-Frank financial reform bill excludes TruPS from being counted as Tier 1 capital, however. The regulation will be phased in between 2013-2016. The expectation is that most issuers will call their preferreds between now and 2016. All calls will be at par—typically that’s $25 a share–so the trick now is to only purchase securities trading below par.
(Carla Fried is a writer based in California.)
To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net
