High Income from Fabian
02/27/2004 12:00 am EST
"What opportunities might generate 8% to 10% income with little risk to principal?" asks Doug Fabian, who is introducing a new service, High Monthly Income, in which he highlights the best plays among ETFs, rising rate funds, international bonds, and TIPS.
"My new mutual fund service is designed for individuals with $300,000 or more in their tax-deferred accounts and want to generate high monthly income without risking principal. My research team and I are examining all of the investment opportunities that best fit our criteria for meeting our annual growth and risk management goals. Income investing is different than growth investing in that—with growth—you’re primarily interested in appreciation. Unfortunately for income investors, maintaining a strong income stream has recently become increasingly challenging and risky, especially in today’s artificially low-interest-rate environment where hikes are inevitable. I will be looking at the cream of the crop among income opportunities. Here are some opportunities we will be following:
Brand New, High-Yield ETFs
"Dividends used to be the primary driver for a stock’s total return in the first half of the 20th century. In many ways, this has been overshadowed by capital appreciation in a stock’s price. Yet dividends are making a comeback. And income investors should consider adding some dividend paying stocks to their fixed-income portfolios. The best way I’ve found to do this is with a new dividend exchange-traded fund. The Dow Jones Select Dividend Index (DVY ASE), which invests in 50 of the highest dividend-yielding companies in the Dow Jones U.S. Total Market Index (excluding REITS) that have a proven track record for consistent dividend payout.
Rising Rates Funds
"Believe it or not, there are opportunities for bond investors in a rising interest rate market. One such unique investment is the Rydex Juno Fund (RYJUX). The fund seeks a return that ‘inversely’ correlates to the price movements of the 30-year Treasury bond. In other words, when the interest rate on long bonds goes higher, a typical bond fund’s price and its return will fall. When this happens, when bonds and bond funds fall in price as interest rates move higher, the price of RYJUX goes up.
International Bond Funds
"The Prudent Global Income Fund (PSAFX) falls into this category. It rises in a falling dollar climate with 64% of its holdings invested in foreign securities. The average maturity of bonds is 17 months to protect against a rising interest rate environment.
TIPS/Treasury Bond ETFs
"Here’s a new tool for beating inflation. With TIPS or Treasury Inflation-Protected Securities, you’re going to get a yield that is 3% over core inflation, adjusted semi-annually. (Think a 5%–6% historical rate of return.) The best way to get exposure to TIPS that I’ve seen recently is with the exchange traded fund, the iShares Trust TIPS Fund (TIP ASE). You can also get exposure to the Treasury market through other ETFs, such as iShares Lehman 1-3 Year Treasury Bond Fund (SHY ASE); iShares Lehman 7-10 Year Treasury Bond Fund (IEF ASE), and iShares Lehman 20+ Year Treasury Bond Fund (TLT ASE)."