If you buy a Treasury bond, you know you’ll get back your principal. But that doesn’t mean you won’t lose money. Consider: The yield on ten-year Treasuries is bobbing around at about 1.7%. But given expectations of 2.3% inflation this year—and who knows how much down the road—a 1.7% yield means “you’re going backward a little more slowly than in a savings account,” says Ronald Weiner, president of RDM Financial Group, in Westport, Conn. So we focus on investments that (with one exception) yield 2.5% or more.
See Also: 45 Ideas for Getting More Yield
Start with dividend-paying stocks. You’ll earn the payout, plus there’s potential for share-price gains. We’re partial to funds that invest in companies that regularly boost their dividends, rather than those that pay the highest yield. That’s why we like Vanguard Dividend Growth (symbol VDIGX, yield 2.1%) and SPDR S&P Dividend (SDY, 2.6%), an exchange-traded fund. Over the past five years, both funds returned more than Standard & Poor’s 500-stock index (all figures are through April 5).
Among individual stocks, Philip Morris International (PM, recent price $93, yield 3.7%) boasts high profit margins and exposure to developed and emerging markets. We like Chevron (CVX, $118, 3.1%) because it leads the big-energy group in profitability. RPM International (RPM, $30, 3.0%), which owns Rust-Oleum, the paint and protective-covering maker, is a play on the recovering U.S. housing market. And Swiss drug giant Roche Holding (RHHBY, $59, 2.9%) is bolstered by two blockbuster products that have patent protection until 2019.
As for bond funds, we’re keen on managers who can troll the entire world of fixed-income securities. That’s why we like Osterweis Strategic Income (OSTIX, 2.9%) and Metropolitan West Unconstrained Bond (MWCRX, 2.7%), go-anywhere funds that are well-positioned to withstand rising interest rates. Consider, too, DoubleLine Total Return (DLTNX, 3.8%), which holds non-government-agency mortgage bonds, a good play in times of rising rates. All three are in the Kiplinger 25, the list of our favorite funds.
Although floating-rate loans come with some credit risk, delinquency rates are falling. Fidelity Floating Rate High Income (FFRHX, 2.5%) and T. Rowe Price Floating Rate (PRFRX, 3.0%) are the top picks in this sector.
Junk bonds are riskier, so we look for conservatively managed funds. Fidelity Focused High Income (FHIFX, 3.6%) concentrates on double-B-rated bonds, which are one notch below investment-grade status. And Wells Fargo Advantage Short Term High Yield Bond (STHBX, 2.5%) buys—you guessed it—short-term junk bonds.