Think Outside the Bank to Boost Yield-Page 2-Kiplinger

18 Jan

Yields From 5% to 8%

This is the top end of the yield range for everyday categories such as municipals and blue chips. Shares of AT&T (T) and Verizon (VZ) sometimes trade down a few dollars to yield over 5%, which is when buyers step in. A few real estate investment trusts also beat 5%, though a multi-year rally in REIT prices has most trusts in the 3% to low 4% range. You can get a hair over 5% in two sound REITs that own freestanding retail buildings, Realty Income (O) and National Retail Properties (NNN). Both were flat in 2013, making this a good time to enter. Another fine REIT with a high yield is Government Properties Office Trust (GOV), which pays 7% from renting space to the IRS, FBI and such. The market thinks there\’s risk here because the feds are strapped for money and presumably set to play hardball on new and renewal leases.

High-yield, or junk, corporate bonds normally pay five to six percentage points over Treasuries, so you\’ve had chances aplenty to lock in 8% or 10%. Today\’s yield premium to Treasuries is just four points, a narrow gap that in the past sparked sharp selloffs. But as long as the alternatives pay so little, there\’s no reason junk in the 5% to 6% neighborhood will lose supporters soon. First-class no-load sponsors such as Fidelity (FAGIX), Metropolitan West (MWHYX), TIAA-CREF (TIYRX) or USAA (USHYX) do fine. So do many others that normally have sales charges—Hotchkis & Wiley High Yield (HWHAX) stands out—but are available without a sales charge to customers of certain brokerages such as Fidelity and Charles Schwab. At 4.6%, the current yield on the Fidelity fund is a tad below 5%, but its 2013 total return through December 5 is 8.2%.

The price of crude oil is falling and natural gas is cheap, but you can easily turn energy into high income. The most consistently high-paying income investment of them all is the master limited partnership, a tax-advantaged structure used by businesses that own pipelines, refineries, storage tanks, hydraulic fracturing (fracking) sand mines and other energy-related infrastructure. The big established groups such as Magellan Midstream Partners (MMP), Plains All-America Pipeline (PAA) and El Paso Pipeline Partners (EPB), to name three, are suitable to buy and forget. If current yield on any of these dips below 5%, it won\’t stay there long because a dividend boost is probably around the corner.

Super Yields of More Than 8%

The most realistic way to capture 8% is in a leveraged closed-end fund that owns high-quality municipal and corporate bonds or high-dividend stocks. The fund generates the extra income by borrowing to buy additional investments. Pimco is the source for a few worthy funds, such as Pimco Income Opportunity (PKO). It invests in an assortment of just about anything, foreign or domestic, that throws off high income. Pimco Corporate and Income Strategy (PCN) is similar. Both funds yield slightly more than 8% (total returns 9.3% and 8.0%, respectively) and are fine for mad money, or at the fringe of a widely diversified portfolio.

via Think Outside the Bank to Boost Yield-Page 2-Kiplinger.


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