by Bryan Perry | May 26, 2011 4:33 pm
In these uncertain times, it is important that investors find high yields, as well as stable, reliable income – in other words, the best of both worlds when it comes to dividends.
That is why I’m recommending what I call “ballast-type securities,” which are all-weather investments that will hold up in a turbulent market and still provide a 7% to 10% income stream.
In particular, there are two high-dividend ETFs that I think make a lot of sense right now.
I like the Dow Jones Industrial Average because it’s made of multinationals, as most of its component companies generate 60% or more of their income outside of the United States. Therefore, it is representative of the export market, which we excel at, as U.S. goods and services are in demand around the world. Additionally, the big money likes to stay in mega-cap stocks like those that compose the index.
So there’s stability in the index, but what about big yields? That’s where the high-dividend ETF Dow 30 Enhanced Dividend Premium & Income Fund (NYSE: DPO[1]) comes in.
DPO contains the Dow 30 stocks, but also uses options, covered calls to be specific, so that the fund is leveraged about 20%, and it throws off a fat 9% yield. So you’re getting the best of both worlds with the safety afforded by investing in the most conservative of the three indexes, as well as a big yield. It pays quarterly and trades right around net asset value (NAV).
Right now, we’re in the sweet spot for convertible securities, because interest rates may start to rise later this year or next year, and the U.S. dollar is weak. And I like to play this with the AGIC Convertible Income Fund (NYSE: NCV[2]).
Convertible stocks and convertible bonds allow those managers to have a bond equivalent, if you will, and if the underlying stock that the convertible bond represents moves up, they can convert it into common stock.
For example, if you have a General Electric (NYSE: GE[3]) convertible bond, and the stock goes from $20 to $25, and it’s convertible at $23, then you get the nice ride up, and you don’t have a problem if rates go up and the stock market is still going up. And you don’t have the problem of a falling bond price there, because it’s still tied to equity.
So this is a really good argument right now for convertible bonds, because rates are low, and they’re probably going to go higher in the next year or so, and at the same time, they’re still bullish on the stock market.
In short, NCV is a really great way to play the market and also get a bond-type yield of about 10% paid monthly.
Dividend Stocks[4]
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