Bonnanzio's Best Bets Among Fidelity Income Funds

07/10/2020 5:00 am EST

Focus: FUNDS

John Bonnanzio

Editor, Fidelity Monitor & Insight

A high dividend often isn’t worth the larger downside risk of a capital loss. In other words, don’t be sucked into buying a fund simply because of its yield, cautions John Bonnanzio, editor of Fidelity Monitor & Insight.

To that end, we wouldn’t run out to buy any of Fidelity’s top yielding funds. Presently, a better (and less risky) approach to income generation is holding a combination of high-yield bonds and a diversified bond fund that’s rich with corporates (rather than governments) securities.

Keeping in mind that inflation is a negligible 0.1% (yes, that will rise as the economy recovers), even today’s lower-yielding bonds will keep you ahead of inflation.

For example, with yields of 4.38% and 4.72%, respectively, Fidelity Capital & Income (FAGIX) and Fidelity High Income (SPHIX) are giving high-yielding stock funds a run for their money, and they stand to benefit more from a recovering economy.

As for investment-grade funds, we like Fidelity Limited Term Bond (FJRLX) and Fidelity Total Bond (FTBFX) which yield 1.20% and 1.79%, respectively. Both have less credit risk relative to high-yield funds, while their yields get a boost from corporates.

And, when combined with very short-maturity corporates held by Fidelity Conservative Income (FCONX), risk is further reduced. Amid so much uncertainty, corporate dividends will remain under stress for the foreseeable future.

In fact, Bank of America estimates that dividend payouts for the S&P 500 could fall 10% this year, having hit a record high of $491 billion last year. While that decline is already priced in, income investors should be especially careful to risk catching a falling knife.

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