The problem with the red-hot names you hear being touted as the “next big thing” is that they rarely pay much of a yield, if any, and they’re likely to fall right back out of favor when their 15 minutes are up. After all, the market has become much more risk averse and is favoring stocks that are thriving because of organic growth, not empty buzz.
So, while I know reading about things like senior-secured loans and adjustable-rate mortgages can be about as much fun as watching paint dry, as an income investor, those are just the kinds of investment themes you need to focus on. Strong fundamentals are the name of the game for smart yield-seekers, not trend stocks that get more attention from gimmicks and rumors than from their actual businesses.
The two names I’ll discuss today are not ones that will make Jim Cramer jump up and down with excitement on CNBC, but they do pay exceptionally high (and stable) income in a market that’s rewarding that objective.
PowerShares KBW High Dividend Yield Financial Portfolio ETF (KBWD)
Even a small pop in interest rates is very bullish for banks because their net interest margins — which are the primary drivers of profitability and net income — begin to improve. Therefore, analysts are starting to raise their outlooks for stocks — like JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) — because we may be seeing the makings of a better spread, in which banks will borrow money at the current Fed funds rate for next to nothing and then turn around and loan it out at better rates. So, again, a little bit of a pop in interest rates is a good thing for these stocks.
One way that I like to play it is through the PowerShares KBW High Dividend Yield Financial Portfolio ETF (KBWD), which pays a 7.8% yield and has a number of mortgage real estate investment trusts and the business development companies built into it. We own a couple of those in my Cash Machine service because I’ve found that having exposure to these specialty financials makes for a nice combination. With KBWD, you get a diversified holding of high-yielding securities that is unleveraged and gives investors a chance to be a part of what may be a rally in the making for the financials.
KBWD has been trading at the high end of its long-term range for quite a while and just challenged its 52-week high on Sept. 11 before coming in with the rest of the market. When a lot of bank stocks have been struggling to get out of bed, KBWD has been quietly doing well. After all, people are still going after yield, and KBWD pays nearly 8% with its monthly dividend schedule.
Guggenheim Strategic Opportunities Fund (GOF)
Back in June, we all stood up and took notice when rates ran up to 3% on the 10-year, wondering whether we were in the right place. Well, when you own the Guggenheim Strategic Opportunities Fund (GOF), you definitely are. The fund pays a very nice yield of 10%. GOF owns a lot of different asset-backed and general bonds, though its biggest single holding (about 7% of the portfolio) is in the SPDR S&P 500 ETF Trust (SPY). So, GOF is primarily a bond fund but with a good amount of equity exposure as well.
The Guggenheim Strategic Opportunities Fund is a great way to be in corporate debt, the asset-backed market and senior loans — which are GOF fund’s three largest asset classes — but also have a call on the stock market in the form of that big position in the SPY.
The Guggenheim Strategic Opportunities Fund is what I would just call “hybrid income,” and I love it when I can find a management team that’s being creative like GOF fund’s is. I want to be in the tug-of-war in the bond market while getting a better yield from the fund managers’ use of leverage, and at the same time, I want to participate in the stock market on the upside.
The GOF fund is trading barely higher than where it was at the beginning of the year, but its investors are earning a very nice double-digit yield with monthly income.
My main objective is to find stable high-yield income from a position that doesn’t move around a whole lot. So, although funds like the KBWD and GOF aren’t the flashiest names you could buy, they are exactly in the wheelhouse of what I’m trying to accomplish with my high-yield strategy.
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Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.