In the past, I did not spend much time discussing bonds since I knew it was only a matter of time until they started losing value. But now that the Federal Reserve has abandoned its Zero Interest Rate Policy (ZIRP), bond yields are quickly reverting to historical norms, notes Jim Pearce, editor of Personal Finance.
We aren’t quite there yet, but eventually the Fed will start easing off on rate hikes. When that happens, bond prices should stabilize. From that point forward, bond funds should be safe to own again. That is especially good news for retirees, many of whom require regular withdrawals from their investment accounts to make ends meet.
The days of having to count on erratic stock market appreciation for their retirement income are numbered. Instead, they can move that money into a portfolio of diversified bond funds to provide steady income in retirement. Here are a few that I like for that purpose.
You can’t get much more diversified than the Osterweis Strategic Income Fund (OSTIX). Its holdings include 149 different bonds and 7 stocks. The fund’s objective is to “preserve capital and attain long-term capital returns through a combination of current income and moderate capital appreciation.”
The fund has done that well. Since its inception 20 years ago, OSTIX has delivered an average annual total return of 5.7% compared to 3.2% for the Bloomberg U.S. Aggregate Bond Index.
The fund pays dividends quarterly. Its most recent distribution of $0.12346 per share equates to a forward annual dividend yield of 4.9%. The fund holds $4.5 billion in total assets and has a gross expense ratio of 0.84%.
For exposure outside of the United States, consider the Fidelity New Markets Income Fund (FNMIX). According to its sponsor, the fund is “Normally investing at least 80% of assets in securities of issuers in emerging markets and other investments that are tied economically to emerging markets.”
As of September 30, roughly 32% of the debt held by this fund was issued in Latin America. Another 24% is from the Middle East while Africa accounts for 14% of the fund’s total assets.
The fund currently sports a distribution yield of 5.6%, which is considerably less than its 7.5% 30-day yield. That suggests that it is not sacrificing capital to enhance dividend payments. Dividends are paid monthly, and the total expense ratio is 0.8%.
As its name suggests, the Invesco Variable Rate Preferred ETF (VRP) owns variable rate bonds and other hybrid securities with floating interest rates. This fund’s objective is to mimic the performance of the ICE Variable Rate Preferred & Hybrid Securities Index.
Recently, 72% of this fund’s issuers were in the financial sector. Energy companies account for 11% of the fund’s assets while utilities comprise another 8%. All the securities held by the fund are rated BBB or lower by both S&P and Moody’s, so credit risk is a potential issue for this fund.
The fund’s current distribution rate is 4.9% with a 12-month distribution rate of 5.3%. It pays distributions monthly and has a total expense ratio of 0.50%.
To be sure, the value of these three funds can and will fluctuate. However, the downside risk is considerably less now than it was at the start of this year. Their share prices may drop a bit more until the Fed is done raising interest rates, so dollar cost averaging could be an effective strategy over the next six months.