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Searching for yield.
Old 07-18-2012, 06:49 AM   #1
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Searching for yield.

With interest rates so low there have been some recent articles about higher yielding investments than CDs and short term bonds. I'm thinking of mREITS and certain closed end funds which have double digit dividends. I've always been wary of these because they borrow to multiply their return and investing in them would require market timing so that you'd get out before interest rates started to rise........thoughts, opinions?
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Old 07-18-2012, 07:59 AM   #2
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There was an interesting article in the WSJ the other day about a closed end fund that advertised a "distribution yield" of 22%. The problem was that the bulk of the 22% "yield" was return of principal. So beware.

The Intelligent Investor: Yields So High, They Can't Be for Real - WSJ.com
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Old 07-18-2012, 08:03 AM   #3
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There was an interesting article in the WSJ the other day about a closed end fund that advertised a "distribution yield" of 22%. The problem was that the bulk of the 22% "yield" was return of principal. So beware.

The Intelligent Investor: Yields So High, They Can't Be for Real - WSJ.com
+1
Muni CEFs are yielding around 6%, have 30%-40% leverage, and many are now earning less than their distributions. Double digit distributions would mean either lots more leverage, a very concentrated portfolio, or a substantial ROC.
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Old 07-18-2012, 08:09 AM   #4
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I have some shares of AGNC and NLY, and have had pretty good luck with them. So far, at least. AGNC moreso than NLY. I also have a bit in a closed-end gold fund, GGN, that pays out every month.

One thing to beware of is that the dividends these funds pay out are taxed at income tax rates, rather than the lower dividend rate, so unless you have them in an IRA or whatever, you're going to get hit a bit harder with taxes.

AGNC has had such a big run-up lately in price, that I'm a bit leery of buying more at this point. Plus, I don't want any of them to become too large of a percentage of my overall portfolio. Right now, I'd say AGNC, NLY, and GGN combined make up about 9% of my portfolio, so even if they all totally crashed, it wouldn't put me in the poor house.
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Old 07-18-2012, 08:10 AM   #5
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Also be aware that REIT dividends do not qualify for the low dividend tax rate but are taxed at your marginal rate.
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Old 07-18-2012, 08:48 AM   #6
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Also be aware that REIT dividends do not qualify for the low dividend tax rate but are taxed at your marginal rate.
This is true. Of course, the reason for this exception is that REIT dividends are generally not double-taxed like most traditional corporate dividends. Because they get to pass income to shareholders *before* paying taxes on it, they don't get the preferred dividend tax rate.
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Old 07-18-2012, 09:28 AM   #7
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My rule of thumb is to avoid anything that deviates from the mean by a significant amount as it invariably involves excess risk.
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Old 07-18-2012, 09:31 AM   #8
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My rule of thumb is to avoid anything that deviates from the mean by a significant amount as it invariably involves excess risk.
Yup, there is no free lunch. In a climate where investors are starved for (and desperately seeking) yield and where people are willing to pay unprecedented prices for income streams, anything with an abnormally high yield is probably flying a few red flags.
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Old 07-18-2012, 09:42 AM   #9
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With interest rates so low there have been some recent articles about higher yielding investments than CDs and short term bonds. I'm thinking of mREITS and certain closed end funds which have double digit dividends. I've always been wary of these because they borrow to multiply their return and investing in them would require market timing so that you'd get out before interest rates started to rise........thoughts, opinions?
My thought, divide your assets into risk categories. If your AA is 50/50 for instance, then the 50 that's for bonds should be in bonds. That 50% should not be in something that mixes in equity risk. Because then you don't have 50/50 but something like maybe 55/45. If you want 55/45 just do the 55 with equities.

Keep it simple.

FWIW, I'm at my max equity allocation because probable forward bond real returns look lousy to me. TIPS for 5 years out are at negative rates which shows the market is saying the same thing.
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Old 07-18-2012, 09:45 AM   #10
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Here is an interesting comment that may help people decide if they should reach for yield. The author points out that the risk premium for equities is currently high, compared to one month treasuries. Perhaps this is the wrong time to reach for yield?? YMMV.

Investors continue to seek safety - CBS News
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Old 07-18-2012, 09:47 AM   #11
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One must always be cautious when reaching for yield, especially when everyone else is doing so at the same time. The desperate search for yield is clearly becoming a national pastime, so caveat emptor.

If you want to fish in the CEF pool, I would suggest that you look closely at whether the funds you are considering are covering their distributions via the yield on their underlying assets. www.cefconnect.com is helpful for this sort of thing. I can tell you that CEF discounts to NAV (a nice source of returns sometimes) have tightened considerably on anything with a decent yield, so be careful. The most attractive fixed income CEF I can find that has a significant discount is ACG.
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Old 07-18-2012, 09:49 AM   #12
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The muni bond funds and Tax Free High Yield funds have done well for me the last year or two. Yields over 4% and some have yields of 5% and 6%. The NAV's have actually increased showing YTD performances of over 6%. That is in addition to the yield. You have to look at the reported leverage. Some have a low percentage of leverage. I'm not too worried about rates going up any time soon. Not in this economic environment. For years I was a "buy only individual general obligation bonds" person. The last couple of years I've changed my view. I figure the people managing these bonds funds can do a better job than I can in picking them. There are better yields out there than CD's at a bank. Take a look at NOTIX: DWS Strategic High Yield Tax Free (institutional shares) yielding 4.8% with a YTD performance of + 7.34% or PZA - Powershares National Muni Bond yielding 4.4% or FHYVX: Franklin High Yield Tax Free yielding 4.87% with a YTD return of + 6.68. This is not investment advice. These are just a few of what I've been in.
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Old 07-18-2012, 09:55 AM   #13
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There are some strategic allocation bond funds with nice yields. Poke around a little bit. 5% yields are not that hard to find. I would be wary of going long in individual corporates........
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Old 07-18-2012, 10:02 AM   #14
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One must always be cautious when reaching for yield, especially when everyone else is doing so at the same time. The desperate search for yield is clearly becoming a national pastime, so caveat emptor.
....
I agree and would put it more strongly. One would be really stupid to reach for yield here.
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Old 07-18-2012, 10:03 AM   #15
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Here is an interesting comment that may help people decide if they should reach for yield. The author points out that the risk premium for equities is currently high, compared to one month treasuries. Perhaps this is the wrong time to reach for yield?? YMMV.

Investors continue to seek safety - CBS News
You beat me to the punch. Equities are where the action will be, most likely.
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Old 07-18-2012, 10:03 AM   #16
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I agree and would put it more strongly. One would be really stupid to reach for yield here.

Depends. There are always opportunities if you are discriminating and careful. The trouble comes in when people buy everything with a high nominal yield without looking under the hood.
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Old 07-18-2012, 10:05 AM   #17
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As I said I don't like outlandish yields. My idea of pushing the envelope is
Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX)
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Old 07-18-2012, 10:11 AM   #18
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I am looking around for yield too, something for my short term (6 years to empty) bucket. I am considering a blend of a short term treasury bond index and FSBIX (Thompson Plumb Bond Fund). Does anyone have comments on the latter?
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Old 07-18-2012, 10:34 AM   #19
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As I said I don't like outlandish yields. My idea of pushing the envelope is
Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX)
The duration on that is about 5.4 years. So you'd probably want to hold it that long I guess. I notice the 30 day SEC yield is about 2.6% for the admiral equivalent.

But check out the big dip in 2008 to know what risk you are taking on. So I ask myself why take that risk when I could just bump up my equities a bit? Is 2.6% nominal yield something to get excited about?

BTW, my comments are only for those choosing a buy and hold approach. If one is going to try to time the bond component then one needs to do a lot of homework first.
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Old 07-18-2012, 10:37 AM   #20
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But check out the big dip in 2008 to know what risk you are taking on. So I ask myself why take that risk when I could just bump up my equities a bit? Is 2.6% nominal yield something to get excited about?
2.6% is not a big deal. You can get higher without going crazy. You just have to do a little research.
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