By John Wasik
CHICAGO May 10 If you're willing to take on
more risk, it's a good time to move beyond corporate and
government bonds in the incredibly challenging search for yield.
While attention has been on the record-setting stock market
- the Dow Jones Industrial Average closed above the symbolic
15,000 on Tuesday and kept climbing - bond yields have been
heading south. The benchmark 10-year U.S. Treasury is yielding
around 1.8 percent after hitting 2 percent in early March.
An "in-between" portfolio that focuses on yield from
non-traditional sources while owning dividend-rich stocks is one
approach to find income. This strategy is based on the reality
that bond yields probably won't rise much in the next year or
so. You'll have to venture into alternative investments if you
want to boost your income stream.
I've searched for some of the best exchange-traded funds
(ETFs) that offer income and appreciation. The following ETFs
focus on four key themes: Global stock dividends, master limited
partnerships (MLPs), high-yield bonds and real-estate investment
Dividend-paying stocks, for example, can outpace inflation.
In January 2009, the S&P 500 Index dividend yield was 3.24
percent while the Consumer Price Index was a negative 0.34
percent, according to dividend.com.
That doesn't always happen. Even so, cash-rich companies are
in a better position to raise dividends - something bond payers
This mix is not risk-free. It may get hit as hard in a stock
market sell-off, which is why these funds should comprise no
more than 15 percent of your total holdings.
HIGH-DIVIDEND GLOBAL STOCKS
The PowerShares International Dividend Achievers ETF
gives you a selection of dividend payers from around the world.
If something happens to the torrid U.S. market, you have a
The fund, which yields just above two percent, holds
brand-name non-U.S. stocks like Vodaphone and Nippon
Telegraph and Telephone.
It's posted an annualized return of nearly 14-percent during
the three years through May 8, and is up 20 percent for the past
year through that date. The trade-off, however, is that the fund
is more volatile than the S&P 500.
REITs that invest in mortgages have done well since 2008,
thanks to low financing rates, although they are not well known.
The iShares FTSE NAREIT Mortgage PlusCapped Index
invests in major REITs like Annaly Capital Management,
which buys mortgage pass-through certificates and obligations.
This specialized REIT borrows money to buy mortgage-backed
securities. Like all REITs, it must pass through 90 percent of
its income to shareholders.
Currently, the iShares fund is yielding 11 percent. The
downside is that it trades like a stock, and its risk is roughly
the same as the S&P 500. It's up 24 percent through May 8, and
has averaged an annualized gain of 15 percent during the past
MASTER LIMITED PARTNERSHIPS
Until recently, you could only buy these vehicles through
brokers, often paying steep commissions. Now that they're being
packaged in ETFs, they are worth considering for their high
yields, which range from 7 percent to 16 percent.
The Alerian MLP ETF, up 15 percent in the past year
through May 8, holds an index of energy partnerships that mostly
invested in pipeline companies. With an almost 6-percent yield,
the fund probably won't move in lockstep with common stocks, but
it's prone to declines if oil prices slide. The ETF is less than
two years old, so it's too young to have risk measures.
Unlike their government counterparts, "junk" bonds give you
the trade-off of lower credit ratings in exchange for higher
yields. Rated "B" and lower, these are companies that still need
to sell debt, but pose a higher risk of default.
Packaged within an ETF such as the Peritus High-Yield ETF
, you can find some diversification from credit risk.
Although it is actively managed and has a much higher expense
ratio than its peers - 1.35 percent annually versus 0.4 percent
for a similar indexed fund - the Peritus fund sports an 8
It is up 13 percent for the year, besting its benchmark by 2
percentage points, which is a significant advantage in the bond
As a backstop, keep a close eye on interest rates with all
of your bond holdings.
"Be tactical so that you can be ready for the eventual
rising interest-rate environment," advises John Zhong, chief
executive officer and founder of MyPlanIQ.com, a portfolio