investing

4 Great Mutual Funds to Earn 3% to 6% in High-Yield Bonds

A sense that the economic good times can't run on forever has pushed up yields.

Income-hungry investors have long favored high-yield "junk" bonds for the most speculative chunk of their portfolios. Junk securities are any bonds issued by below-investment-grade companies. Because they pose a greater risk of default than high-quality bonds, junk issues must yield more to attract buyers. Lately, junk yields have been pushed higher as investors weigh risk against reward in an aging economic cycle. The average junk-bond yield has risen from a low of 5.4% in 2017 to 6.1% recently, compared with the 3%-to-4% yields of high-quality bonds.

Earnings for All

 

 

The risks: History shows that many investors flee junk bonds when a recession hits, and bond prices can temporarily collapse. Some junk funds lost more than half of their value in the recession of 2007-09 before rebounding.

But over the long haul, the bonds' high yields have more than compensated for issuers that go bust. Over the past 15 years, the average junk bond fund has returned an annualized 6.9% in interest and principal gains, compared with 3.9% for an index of high-quality U.S. bonds.

How to invest: If you're worried that the economy will get rocky, stick with a fund that focuses on higher-quality junk bonds. A fund that fits the bill is Vanguard High Yield Corporate (VWEHX, 5.4%), a Kip 25 member. Over the past 10 years, the fund has gained 6.7% a year, on average, compared with 6.5% for the average junk fund. Its current duration is 4.2. Another long-term winner: Fidelity High Income (SPHIX, 5.8%), a fund known for its adept bargain-hunting under manager Fred Hoff. Its 10-year average annual gain is 7.3%, and the current duration is 3.6.

Loomis Sayles Bond Fund (LSBRX, 3.3%) isn't technically a junk-bond fund, but longtime manager Dan Fuss has excelled as a bond picker, particularly in high-yield issues. The fund recently had 30% of its $13 billion in assets in junk bonds. Overall, Fuss is very cautious: He had 33% of assets in cash, the highest percentage ever, and the fund's duration of 3.3 is the lowest ever. Fuss fears that the economy and markets could be at a turning point, especially if a trade war takes hold. Until the risks are clearer, he says, it makes sense to keep a reserve of dry powder.

With the Fed pushing short-term rates higher, floating-rate bank loan funds are worth a look. These funds buy short-term loans that are mostly rated below investment-grade and carry interest rates that adjust higher with market rates. We prefer Fidelity Floating Rate High Income (FFRHX, 3.6%), which takes a cautious approach and skews toward higher-quality debt.

Most Popular

15 Stocks Warren Buffett Is Buying (And 7 He's Selling)
stocks

15 Stocks Warren Buffett Is Buying (And 7 He's Selling)

Berkshire Hathaway CEO Warren Buffett is a bull once more! The Oracle and his team entered eight new positions and added to others in a big way.
May 17, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Should You Consider a Roth Conversion While the Market is Down?
Roth IRA Conversions

Should You Consider a Roth Conversion While the Market is Down?

Investors who are hurting right now as the stock market takes a hit may want to console themselves with a possible tax bargain created by a Roth conve…
May 16, 2022

Recommended

An Impact Investing Guide for Private Foundations
investing

An Impact Investing Guide for Private Foundations

Putting assets in service of mission can take many forms. Here are four distinct approaches to consider in your efforts to foster positive change in o…
May 19, 2022
The 20 Best Canadian Dividend Stocks for U.S. Investors
dividend stocks

The 20 Best Canadian Dividend Stocks for U.S. Investors

These 20 Canadian Dividend Aristocrats trade on either the NYSE or Nasdaq, and have increased their dividends annually for at least seven years.
May 18, 2022
65 Best Dividend Stocks You Can Count On in 2022
dividend stocks

65 Best Dividend Stocks You Can Count On in 2022

Yield isn't everything when it comes to finding the best dividend stocks. Income investors know there's no substitute for regular dividend increases o…
May 17, 2022
The Berkshire Hathaway Portfolio: All 47 Warren Buffett Stocks Ranked
stocks

The Berkshire Hathaway Portfolio: All 47 Warren Buffett Stocks Ranked

The Berkshire Hathaway portfolio is a diverse set of blue chips, and increasingly, lesser-known growth bets. Here's a look at every stock picked by Wa…
May 17, 2022