If you’re worried that stocks are expensive again, well, they are. The current bull market is making a run at history.
But it’s also costly to stay in cash (and lock in zero income). Fortunately, it’s possible to buy some downside protection with yield.
I understand the “I’m worried so I’m sitting in cash” concern. And I know many investors who continue to sit on their money and hope for a big pullback. But wouldn’t it be nicer to bank 32% total returns with 8%, 9% or even 10% or more of it coming as dividends?
Our Contrarian Income Report subscribers who smartly stayed with Omega Healthcare Investors – a big paying REIT – have done much better than their scared cash hoarder friends, as well as the broader market in general. Last year actually started inauspiciously as OHI announced a dividend “freeze.” The stock slipped. But a freeze isn’t the same as a cut – and OHI’s payout was well covered by its funds from operations (“FFO” – more on why this matters shortly).
The misunderstanding would soon be our gain, as the stock yielded 10% (thanks to years of previous dividend hikes). And anytime that OHI has paid double-digits in the past, it marked a major bottom for the stock. So why would this time be any different?
Let’s “zoom in” to see how OHI rallied off its most recent double-digit high to return 32% including dividends!
Secure yields are the truly the “rubber duckies” of the investing world. Mr. Market can push them underwater for a period of time, but eventually, they rocket up to the surface.
With that in mind, let’s “zig” a zagging stock market by discussing three high paying mutual funds. Big dividends plus a human at the wheel – that’s my idea of a bear-proof payout-powered portfolio.
Vanguard Real Estate Index
- Type: REIT (real estate investment trusts)
- Assets Under Management: $59 billion
- Yield: 4.2%
- Expenses: 0.12%
At a yield of just more than 4%, the Vanguard Real Estate Index – which has a twin fund, the Vanguard Real Estate ETF – isn’t knocking the socks off high-income investors. But VGSLX actually is one of the best-yielding equity mutual funds in the game.
In fact, most of the top mutual funds for equity income are invested in real estate investment trusts (REITs). No surprise there. REITs are naturally income-friendly thanks to their mandate to redistribute 90% or more of their taxable income back to you and me as dividends. Better still, REITs were shackled in 2018, helping to drive up yields to their highest point in roughly a decade!
Vanguard’s indexed REIT fund is weighted by market cap, so the fund is filled with blue chips such as communications-infrastructure play American Tower, mall operator Simon Property Group and logistics REIT Prologis.
It’s a worthy fund that has served its shareholders well since inception in 2001, and it does allow investors to keep almost all of their returns with a cheap expense ratio. That said, if you’re looking to bundle REITs together in a fund, this is one area where active management tends to shine. In fact, several CEFs yield far more than VGSLX and have bested Vanguard’s offering over the long-term.
AB High Income
- Type: High-Yield Bond
- Assets Under Management: $5.9 billion
- Yield: 7.6%
- Expenses: 0.82%*
Next up is a no-brainer in the high-yield field: junk bonds.
You can get plenty of yield out of just the American junk market, but AB High Income takes things a step farther by breaking out its passport and delving into developed-market and emerging-market bonds, too.
AGDAX actually invests in more than just junk debt. High-yield corporates make up 44% of the fund, with another 10% in collateralized mortgage obligations, 9% in investment-grade corporates, 9% in emerging-market sovereign debt, 6% in “global governments” and the rest peppered among other types of income investments.
Unlike with the indexed VGSLX, AllianceBernstein’s fund has plenty of managerial brainpower to go around. Its five-manager team averages nearly 26 years of experience apiece, including 21 years apiece at AB.
But boy, is it costly. The 0.82% in annual fees isn’t all that bad – you’ll typically find that in CEFs – but what you won’t find is an additional 4.25% sales charge that AB charges for these A shares. That will cost you literally thousands if not tens of thousands of dollars over the course of your investment.
Templeton Emerging Markets Bond
- Type: Emerging-Markets Bond
- Assets Under Management: $35.2 million
- Yield: 8.6%
- Expenses: 1.17%*
Emerging-market bonds are one of the highest-yielding assets you can invest in. The inherent enhanced risk of less developed countries – complete with higher levels of corruption, geopolitical risk and less regulated markets – forces sky-high yields to compensate investors for their trouble.
In the case of Templeton Emerging Markets Bond, you’re getting well north of 8% for that trouble, but you’re also actually putting a cap on your risk. See, FEMGX – under the managing team of Michael Hasenstab, Calvin Ho and Laura Burakreis – holds 124 different positions across a number of EMs, such as Brazil, Argentina, Ghana, Indonesia and Thailand.
Management typically wants to invest 80% of the portfolio in EM bonds, but they can use their discretion should opportunity dry up. In fact, at the moment, less than 60% of the portfolio is invested in bonds, with the rest parked in cash.
But those managerial decisions will cost you – in fact, even more than AGDAX.
FEMGX charges a steep 4.25% maximum sales charge, as well as 1.17% in annual expenses. But it doesn’t stop there. There’s also a potential 0.75% CDSC (deferred sales charge), and a 0.25% 12b-1 fee (marketing!) to swallow.
Management certainly earns its fees at times, but it’s hard-pressed to keep up with its own litany of charges.
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