5 Big-Yield Funds to Watch

Focus: FUNDS

James Fink Image James Fink Editor, Jim Fink's Options for Income and Stocks to Watch

You can go out and hunt for yields, or you can find a good manager who knows how to "make" yields using options. After setting some rigorous criteria, this handful made the cut, notes Jim Fink of Personal Finance.

Today’s low-yield world puts income investors in a tough spot.

Fixed-income alternatives are unin­spiring: five-year US Treasuries yield 0.74%, ten-year US Treasuries yield 1.73%, and investment-grade corporate bonds yield only 3.18%. Newly issued corporate bonds—which have reached $3.3 tril­lion in value so far in 2012—are being sold at an even lower average yield of 2.68%.

To earn a decent annual return, a fixed-income investor currently needs to assume much greater credit risk in the form of non-investment-grade bonds (i.e., less than triple-B rated, also known as “junk”), which cur­rently average 6.68%.

The problem with junk bonds is that there is an increased risk of default, especially in a weak economic environment as we are experiencing now. Since the beginning of 2011, the default rate on junk bonds has more than doubled, from 0.8% to 1.8%, and JP Morgan forecasts the default rate to rise further into 2014.

High-yield, dividend-paying stocks are another alternative, but investors have already bid up high-yield stocks to arguably nosebleed levels. According to fund manager AllianceBernstein, stocks with yields 20% or more above the market’s now ac­count for 44% of the S&P 500 on a cap-weighted basis. That’s their highest share in the last three decades, and well above the historical average of 36%.

High Yields at a Discount
One high-yield asset class flying under investors’ radar and which remains attractively priced is covered-call closed-end funds (CEFs).

Studies have demonstrated that a covered-call equity portfolio outper­forms a buy-and-hold stock portfolio over the long-term.