Invest for income — without stocks

19-Aug-2014

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Dividend stocks and real estate investment trusts aren’t the only ways to generate cash flow in your portfolio. Here are 14 other income investments to consider.

Stacks of $100 bills © Svetl/iStock / 360/Getty Images
Money makers

Here are 14 ideas for generating income in seven broad categories — and none involves any common stocks. As always with investment decisions, consider your overall allocation, how long you plan to invest and your tolerance for risk before you make a move.

We’ve listed them in order of yield from lowest to highest. (All returns and yields are through April 4.)

CDs and short-term bonds

Yield: 0.4 percent (average for two-year CDs)

Certificates of deposit may not pay much interest, but you won’t lose money with them, either. That makes them good choices to stash cash that you will need within a year to 18 months.

GE Capital Bank pays 1.1 percent for a one-year CD with a $500 minimum. A two-year CD at Melrose Credit Union ($5,000 minimum) earns 1.4 percent. With short-term rates likely to rise in the next 12 months or so, you’re better off choosing the one-year maturity, even though it yields slightly less than the two-year deposit. Vanguard Short-Term Investment-Grade (VFSTX), a member of the Kiplinger 25, pays a bit more at 1.5 percent, but you might lose a bit of principal if rates rise. (Bond prices and interest rates tend to move in opposite directions.)

Municipal bonds

Yield: 1.9 percent (intermediate-maturity bonds)

If you’re in a high tax bracket, municipal bonds, which pay interest that is generally free from federal income tax (and often state and local income taxes), can be more lucrative than taxable bonds of similar credit quality and maturity.

For instance, a 10-year, triple-A-rated muni bond typically yields about 2.3 percent. For someone in the highest federal tax bracket, that is the equivalent of 4.1 percent from a taxable bond. Even if you’re in the lower, 28 percent federal bracket, your taxable-equivalent yield would be 3.2 percent, which beats the taxable 2.7 percent yield of 10-year Treasuries and the 3.1 percent yield of comparable corporate IOUs.

Our favorite tax-free bond fund, Fidelity Intermediate Municipal Income (FLTMX), invests mostly in high-quality bonds; more than half of the fund’s assets are invested in bonds of triple- or double-A quality with maturities of five years or more. The fund, a member of the Kiplinger 25, yields 1.9 percent, which is a taxable-equivalent yield of 3.4 percent for those in the highest income tax bracket.

We also like USAA Tax Exempt Intermediate-Term Fund (USATX). Its 2.3 percent yield works out to a 4.1 percent taxable-equivalent yield for top-bracket investors. The fund’s managers goose the yield a little by focusing on the lower rung of investment-grade bonds.

Intermediate-term bonds

Yield: 2.4 percent (investment-grade index)

The longer a bond’s maturity, the more it usually yields, but the more vulnerable it is to higher rates.

The best trade-off between risk and yield is in the middle of the maturity spectrum. The typical taxable, intermediate-term bond fund yields 2.1 percent. But you’ll get more with Vanguard Intermediate-Term Corporate Bond ETF (VCIT), an exchange-traded fund with a 3.3 percent yield. It holds mostly investment-grade debt in bonds of five- to 10-year maturities, but half of the fund is invested in the lower end of the investment-grade spectrum (debt rated triple-B). The fund’s annual fee of 0.12 percent scrapes near the bottom.

Fidelity Total Bond (FTBFX), another Kip 25 fund that yields 2.8 percent, holds mostly a mix of high-grade corporate bonds, government bonds and mortgage securities. At last word, it also had 14 percent of its assets in junk bonds.

Floating-rate loans

Yield: 3.4 percent (average for bank-loan funds)

Rising interest rates are bad news for most bonds, but not this kind of security: The rates on these loans, which banks typically make to companies with below-investment-grade credit ratings, move in step with the market.

That’s because they are tied to a short-term benchmark and reset every 30 to 90 days. Because the borrowers have above-average credit risk, we like funds that tilt toward better-quality or widely traded loans.Fidelity Floating Rate High Income (FFRHX), which yields 2.6 percent, has an average credit quality of double-B, better than the single-B average quality for the category.

PowerShares Senior Loan Portfolio (BKLN), an ETF yielding 4.2 percent, tracks an index of the 100 largest and most widely traded bank loans.

High-yield bonds

Yield: 5.2 percent (average for junk bonds)

Debt rated double-B or lower, or junk bonds, can be risky.

But default rates, arguably the biggest risk with high-yield debt, are at 20-year lows and likely to stay low as the U.S. economy improves. And that’s a boon to junk bond funds.

USAA High Income (USHYX), with a 4.7 percent yield, has consistently turned in above-average returns without taking on undue risk. Over the past decade, it has been less volatile than its peer group. About 70 percent of the fund’s assets recently sat in bonds rated double-B or single-B (par for the category), but it also had about 15 percent in investment-grade debt.

For a bit more yield at 4.9 percent, reach no further than SPDR Barclays High Yield Bond (JNK), an ETF that tracks an index of widely traded junk bonds and charges an annual fee of just 0.4 percent.

Emerging-markets debt

Yield: 5.8 percent (emerging-markets bond index)

With slower growth in China, political turmoil in Brazil and Turkey, and Russia’s annexation of part of Ukraine, it’s no wonder that emerging-markets securities performed poorly last year. But things are looking brighter: In the first quarter of 2014, emerging-markets bonds returned 2.9 percent, beating the U.S. bond market by a full percentage point. And their yields are hard to beat.

Our favorite emerging-markets debt fund is Fidelity New Markets Income (FNMIX), a member of the Kiplinger 25 that yields 5.4 percent. Longtime manager John Carlson focuses on dollar-denominated debt, a more stable way to invest in these securities because foreign currencies tend to be volatile. Over the past decade, New Markets Income returned 9.2 percent annualized, beating its typical peer by an average of 1.2 percentage points a year.

PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), with a 5.1 percent yield, has several things working in its favor. It also focuses on dollar-denominated debt, a more stable way to invest in these securities, and its 0.50 percent annual expense ratio is below-average for its peer group. We like, too, that its portfolio is spread roughly evenly among 23 countries, with each accounting for 4 to 5 percent of the fund’s assets.

Preferred shares

Yield: 6.7 percent (average of preferred stocks)

These hybrid investments behave more like bonds than stocks. Befitting securities with extra-high yields, preferreds carry above-average risks. First, most are issued by financial firms, so funds that focus on preferred stocks tend to be heavily invested in that sector. And because preferreds pay fixed dividends, they tend to lose value when interest rates rise. In 2013, just the possibility of a rise in rates sent preferreds tumbling. But the selloff enhanced the group’s appeal. As share prices fell, yields rose.

The best way to invest in this sector is through an ETF. PowerShares Preferred (PGX) pays a 6.4 percent yield and has the top three-year return of all preferred-stock ETFs: 6.6 percent annualized. Its top holdings include issues from Barclay’s and HSBC, and it charges 0.50 percent in annual fees.

http://money.msn.com/investing/invest-for-income-without-stocks


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