High-Yield Retirement Funds — With Safety

by Marc Bastow | November 14, 2012 1:10 pm

Last week’s dramatic pullback in the stock market was a double-edge sword for fixed income. As investors retreated in the face of the U.S. fiscal cliff and the European debt crisis, they moved into the relative safety of U.S. government securities. Prices for those bonds rose, which is the good news, while their yields dove.

Those falling yields, of course, are bad news for retirement funds and retirees holding those securities. The same forces are at work so far this week, with the 3-month Treasury down to 0.08%, while the 10-year and 30-year instruments get you 1.60% and 2.73% yields, respectively.

In addition to those shrinking yields, other forces are also making it harder to plan for retirement: Taxes on dividend income are sure to rise, further lowering effective yields; prices of the most popular dividend stocks may fall, thanks to those tax increases; and Ben Bernanke (and/or his successor) will likely keep rates low to promote investment.

All of which means investors have to hunt harder for new sources of higher returns. Of course, the wise ones won’t rush into silly instruments simply because they promise double-digit yields.

The search for higher yields with a level of comfort that should satisfy most retirement portfolios leads to a number of exchange-traded funds with strong fundamentals, good managers and yields that are attractive without causing eyebrow-raising flags.

Pimco offers two ETFs worth noting. The Pimco 0-5-Year High Yield Corporate Bond Index (NYSE:HYS[1]) sports a 4.04% 30-day SEC yield — the metric to use when comparing bond funds[2] — with a relatively high expense ratio of 0.55%. HYS contains lots of Treasury bills along with corporate bonds from issuers like Sprint (NYSE:S[3]) and Dish (NASDAQ:DISH[4]). The ETF’s year-to-date return of 3.8% isn’t too shabby, either.

Pimco Intermediate Grade Corporate Bond Index (NYSE:CORP[5]) provides a 2.31% yield and an 8.8% year-to-date return. Total expenses are a fairly low 0.20%, and corporate bond investments include Verizon (NYSE:VZ[6]) and JPMorgan (NYSE:JPM[7]).

BlackRock’s (NYSE:BLK[8]) iShares offers include the iShares Core Long Term U.S. Bond (NYSE:ILTB[9]), with a yield of 3.35% and an expense ratio of 0.12%. A year-to-date return of 3.97% puts investors well above 10- and 30-year Treasury yields. Holdings are strictly long-term U.S. Treasury securities, still the safest bet on the planet.

The iShares High Dividend Equity Fund (NYSE:HDV[10]) is another way to play the dividend game, even though changes to taxation may affect yields down the road. The good news is a basket of equities that includes AT&T (NYSE:T[11]), Johnson & Johnson (NYSE:JNJ[12]) and Procter & Gamble (NYSE:PG[13]) helps cushion individual stock fluctuations, and the fund’s yield of 3.55% is solid. However, the 0.40% expense ratio would be worth watching long-term. HDV’s year-to-date return is just over 6%, a nice pick-me-up for a retirement portfolio.

Do you have any particular funds worth mentioning to fellow investors? Drop us an email, and we will look into it!

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.

  1. HYS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HYS
  2. the metric to use when comparing bond funds: https://investorplace.com/2012/07/etf-yields-arent-a-clear-cut-number/
  3. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  4. DISH: http://studio-5.financialcontent.com/investplace/quote?Symbol=DISH
  5. CORP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CORP
  6. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  7. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  8. BLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=BLK
  9. ILTB: http://studio-5.financialcontent.com/investplace/quote?Symbol=ILTB
  10. HDV: http://studio-5.financialcontent.com/investplace/quote?Symbol=HDV
  11. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  12. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  13. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG

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