Searching for income, investors have been pouring cash into high-yield municipal funds, which hold bonds that are rated below-investment grade. According to Morningstar, the tax-free funds yield 4.0%. That is the equivalent of a taxable bond with a yield of more than 6% for someone in the top tax bracket. In comparison, intermediate municipal funds -- which emphasize investment-grade bonds -- deliver tax-free yields of only 1.6%.
While low-quality municipals can be enticing, they come with considerable risk. During the market turmoil of 2008, high-yield municipal funds lost 25.3%, trailing intermediate funds by 23 percentage points. Because of the big losses, the high-yield funds rank as the worst-performing municipal category for the past five years.
To get decent income without taking on much risk, many investors should consider those investment-grade funds that deliver above-average yields. The funds fatten their yields by holding big stakes in bonds rated A and BBB, the two lowest rankings in the investment-grade universe.
This strategy is different from the approach of typical investment-grade portfolios, which steer away from BBB bonds and focus on issues that are rated AAA and AA, the top two categories. While they yield 2 percentage points more than top-rated AAA issues, the BBB bonds have tiny default rates. Defaults should remain limited because many municipalities have reduced budget deficits in recent years by cutting payrolls and raising taxes.
Intermediate funds with above-average yields and strong long-term performance records include BlackRock Intermediate Municipal (MEMTX), Commerce National Tax-Free Intermediate Bond (CFNLX), USAA Tax Exempt Intermediate-Term (USATX), and Vanguard High-Yield Tax-Exempt (VWAHX).
A steady choice is USAA Tax Exempt Intermediate-Term, which yields 2.5%. During the past 10 years, USAA returned 5.0% annually, outdoing 85% of intermediate competitors. While the average intermediate fund has 63% of assets in bonds rated AA or AAA, USAA only has 32% in the top two grades. The average fund has 8% of assets in BBB bonds, compared to 27% for USAA.
"We manage our fund with an income focus, and a lot of times we have the highest yield available in the intermediate-term category," says portfolio manager Regina Shafer.
View the original article here
Showing posts with label Funds. Show all posts
Showing posts with label Funds. Show all posts
Friday, May 11, 2012
Monday, May 7, 2012
Protect Nest Eggs With Stable Value Funds
With the Federal Reserve holding down interest rates, plenty of cautious savers feel forced to accept puny yields. Money-market funds pay next to nothing, and most five-year certificates of deposit yield less than 1%. But investors in 401(k) plans have a richer alternative: stable value funds, which yield 2.9%.
In recent years, stable value funds have served as workhorse investments, accounting for 12% to 15% of assets in 401(k) and other defined contribution retirement plans. The funds have $540 billion in assets, according to the Stable Value Investment Association.
The value of the stable funds became clear as the financial crisis savaged 401(k) plans. During 2008, stocks plummeted, and many bond funds dropped sharply. But throughout the turmoil, millions of savers were protected by holding stable value funds. Nearly all the funds stayed afloat, returning more than 4% for the year.
8 Stocks Rising Fast on Rich People's Spending
Some investors think of stable value funds as bank accounts. The funds protect principal and pay interest. But the stable value accounts are not guaranteed by the Federal Deposit Insurance Corp. Instead the returns of the funds are protected by insurance contracts known as wraps that are offered by banks and insurance companies.
In some key respects stable value funds resemble intermediate-term bond mutual funds. Both kinds of funds invest in portfolios of bonds. When interest rates rise, the value of the bonds tends to fall. If that happens, a shareholder in a typical bond mutual fund could lose principal. In contrast, a saver who makes a withdrawal from a stable value fund would not suffer because the insurance contract protects against principal losses.
In the event of bankruptcy or other problems, stable value funds can lose the insurance protection. But when the insurance lapses, savers do not necessarily suffer big losses. After Lehman Brothers went bankrupt in 2008, insurance coverage terminated for the company's 401(k) plan. Lehman employees with assets in the stable value fund lost about 1% of their principal. That was an annoying outcome -- but not as devastating as the losses that many investors suffered in the stock market.
View the original article here
In recent years, stable value funds have served as workhorse investments, accounting for 12% to 15% of assets in 401(k) and other defined contribution retirement plans. The funds have $540 billion in assets, according to the Stable Value Investment Association.
The value of the stable funds became clear as the financial crisis savaged 401(k) plans. During 2008, stocks plummeted, and many bond funds dropped sharply. But throughout the turmoil, millions of savers were protected by holding stable value funds. Nearly all the funds stayed afloat, returning more than 4% for the year.
8 Stocks Rising Fast on Rich People's Spending
Some investors think of stable value funds as bank accounts. The funds protect principal and pay interest. But the stable value accounts are not guaranteed by the Federal Deposit Insurance Corp. Instead the returns of the funds are protected by insurance contracts known as wraps that are offered by banks and insurance companies.
In some key respects stable value funds resemble intermediate-term bond mutual funds. Both kinds of funds invest in portfolios of bonds. When interest rates rise, the value of the bonds tends to fall. If that happens, a shareholder in a typical bond mutual fund could lose principal. In contrast, a saver who makes a withdrawal from a stable value fund would not suffer because the insurance contract protects against principal losses.
In the event of bankruptcy or other problems, stable value funds can lose the insurance protection. But when the insurance lapses, savers do not necessarily suffer big losses. After Lehman Brothers went bankrupt in 2008, insurance coverage terminated for the company's 401(k) plan. Lehman employees with assets in the stable value fund lost about 1% of their principal. That was an annoying outcome -- but not as devastating as the losses that many investors suffered in the stock market.
View the original article here
Thursday, May 3, 2012
Get Fat Yields With Foreign Dividend Funds
Hungry for reliable income, investors have been embracing dividend-paying blue-chips. Plenty of solid utilities and consumer companies yield 3%. That seems like a rich payout at a time when 10-year Treasuries yield 2.0%.
But to get an even higher yield, consider funds that focus on foreign dividend stocks. Many foreign blue-chips yield more than 4%. Forward International Dividend(FFINX), a mutual fund, yields 5.9%.
Besides paying higher yields, foreign dividend payers tend to be cheaper than their U.S. counterparts. While the S&P 500 has a forward price-to-earnings ratio of 13, the stocks in the Forward fund have a P/E of 8.6.
Foreign small-cap funds can be attractive. WisdomTree International SmallCap Dividend(DLS), an exchange-traded fund, yields 3.8% and has P/E of 11. In comparison, the Russell 2000 small-cap index yields 1.4% and has a P/E of 17.
Foreign stocks have traditionally paid higher yields than their U.S. counterparts. Investors in many countries have preferred fat dividends, and companies have paid out relatively large amounts of their earnings.
But these days, the foreign yields are especially rich because the stocks are out of favor. At a time when debt problems plague Europe and Japan, many foreign economies are struggling, and the markets are depressed. As share prices fall, dividend yields rise.
To find the best dividend payers, Forward International portfolio manager David Ruff considers stocks of all sizes that yield more than 2%. The companies must have strong earnings and the ability to increase dividends at double-digit annual rates.
Ruff pays close attention to the dividend payout rate, which is the percentage of earnings that goes to cover the dividend. He typically prefers stocks with payout rates of 30% to 60%.
When the payout rate is lower, Ruff worries that management is not committed to paying dividends consistently and could spend extra cash on reckless acquisitions. Companies with high payout ratios could be on shaky ground.
"If the payout rate is 95%, then there is not much room to increase the dividend in the future," he says.
A big holding in the fund is Unilever(UN), the Dutch maker of Lipton tea and Hellmann's mayonnaise. The stock yields 3%. Another holding is Sanofi(SNY), a French drugmaker that yields 4.7%.
View the original article here
But to get an even higher yield, consider funds that focus on foreign dividend stocks. Many foreign blue-chips yield more than 4%. Forward International Dividend(FFINX), a mutual fund, yields 5.9%.
Besides paying higher yields, foreign dividend payers tend to be cheaper than their U.S. counterparts. While the S&P 500 has a forward price-to-earnings ratio of 13, the stocks in the Forward fund have a P/E of 8.6.
Foreign small-cap funds can be attractive. WisdomTree International SmallCap Dividend(DLS), an exchange-traded fund, yields 3.8% and has P/E of 11. In comparison, the Russell 2000 small-cap index yields 1.4% and has a P/E of 17.
Foreign stocks have traditionally paid higher yields than their U.S. counterparts. Investors in many countries have preferred fat dividends, and companies have paid out relatively large amounts of their earnings.
But these days, the foreign yields are especially rich because the stocks are out of favor. At a time when debt problems plague Europe and Japan, many foreign economies are struggling, and the markets are depressed. As share prices fall, dividend yields rise.
To find the best dividend payers, Forward International portfolio manager David Ruff considers stocks of all sizes that yield more than 2%. The companies must have strong earnings and the ability to increase dividends at double-digit annual rates.
Ruff pays close attention to the dividend payout rate, which is the percentage of earnings that goes to cover the dividend. He typically prefers stocks with payout rates of 30% to 60%.
When the payout rate is lower, Ruff worries that management is not committed to paying dividends consistently and could spend extra cash on reckless acquisitions. Companies with high payout ratios could be on shaky ground.
"If the payout rate is 95%, then there is not much room to increase the dividend in the future," he says.
A big holding in the fund is Unilever(UN), the Dutch maker of Lipton tea and Hellmann's mayonnaise. The stock yields 3%. Another holding is Sanofi(SNY), a French drugmaker that yields 4.7%.
View the original article here
Subscribe to:
Posts (Atom)