Investors are clamoring for yield currently. And with interest rates hovering near zero and no signs of a rate increase, the outlook for high-yield funds is bleak.
There are several paths to take when seeking yield. Consider high-dividend equity funds or low-credit quality bonds. If you choose the higher dividend equity funds, you run the risk of falling principal when the stock market declines. Or, should the economy suffer, there’s the possibility of dividend cuts. High-yield bond funds carry default risk and loss of principle. In fact, the only secure investments right now are government bonds. But in October 2020, the 10-year treasury yield is hovering around 0.75. That’s not sufficient return to keep pace with 2% inflation.
Some financial advisors are recommending higher allocations of stock investments, due to lower interest rates. This approach might be reasonable for younger investors, with time until retirement. However, older individuals focused on capital preservation and cash flow don’t have the luxury of easily recovering from a 40% market decline.
So, for investors willing to endure greater default and loss of principle risk, here are several of the best high-yield funds for cash flow:
- First Trust Dow Jones Global Select Dividend Index Fund (NYSEARCA:FGD)
- Invesco International Dividend Achievers ETF (NASDAQ:PID)
- iShares High Yield Bond Factor ETF (BATS:HYDB)
The funds are a mix of fixed and equity investments. They cover global equity and high-yield bond ETFs. Also, don’t forget that reaching for yield can lead to greater volatility. And its worth noting is that when interest rates rise, bond fund values typically decline. Although newer, higher yielding issues replace maturing securities.
Great High-Yield Funds for Cash Flow: First Trust Dow Jones Global Select Dividend Index Fund (FGD)
SEC Yield: 6.84%
Companies in FGD represent 10 areas, including the United States, Hong Kong and Canada. Each firm must pass eligibility screens for dividend quality and liquidity. After passing the criteria, including a payout ratio of less than or equal to 60% for U.S. and European countries and 80% for the others, the firms are ranked by dividend yield. Along with other screening metrics, the top-100 highest yielding stocks are included in the fund.
Moreover, the gross expense and net expense ratios are both 0.59%. The stocks range in size from large- to small-cap. It’s important to note that the fund make up consists of 55.43% in the financials sector and 9.09% in communications.
Overall, FGD is a high-yield global equity fund appropriate for investors seeking cash flow, international exposure and comfortable with volatility.
Invesco International Dividend Achievers ETF (PID)
SEC Yield: 6%
International equities continue to emerge as high-yield opportunities. PID tracks the Nasdaq International Dividend Achievers Index, which includes companies with a five-year record of increasing dividends.
The top five countries represented in the fund are Canada (54.98%), the U.K. (8.88%), the U.S. (5.29%) and Russia (4.41%). Also, the fund is highly concentrated in the top three sectors: Financials (25.71%), Energy (23.83%) and Utilities (11.72%).
Moreover, the management fee is a reasonable 0.40%. Thus, yield-seeking investors who believe international markets are poised to grow might consider investing in PID.
iShares High Yield Bond Factor ETF (HYDB)
SEC Yield: 5.11%
This fixed income fund tracks a U.S. dollar-denominated, high yield corporate bond index. High-yield bond funds focus on lower credit quality bonds.
Overall, the fund has a weighted average maturity of 4.15 years and an average yield to maturity of 5.36%. The intermediate term will mediate some of the principle value decline should interest rates rise.
The fund is broadly diversified and spans many sectors. Although, the top five make up 70% of the holdings and include consumer cyclical (18.91%), communications (15.3%), energy (14.14%), consumer non-cyclical (11.29%) and basic industry (9.26%).
That said, fixed income investors comfortable going out on the credit spectrum might like HYDB. Additionally, these well-known firms populate the top-ten holdings: Occidental Petroleum (NYSE:OXY), Ford (NYSE:F), Kraft Heinz (NASDAQ:KHC) and Netflix (NASDAQ:NFLX).
On the date of publication, Barbara Friedberg did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.