Earn 6% to 8% With High-Yield Bonds

Issued by firms with below-average credit ratings, these bonds pay much more than investment-grade IOUs. The average “junk” bond now yields 8.4%, according to Merrill Lynch, up from about 5% in mid 2014. Today’s plump yields should help the bonds retain more value should interest rates rise.

41 Ways to Earn Up to 11% Yield on Your Money

Earnings for All

Risks to your money. Defaults are rising, led by the energy, metals and mining industries. Ratings agency Fitch predicts that high-yield bonds will default at a rate of 6% in 2016, up from 3.5% in 2015. Although that’s well below peak rates of about 10% in a typical market cycle, making money gets harder when defaults are escalating, says Marty Fridson, a veteran high-yield analyst. Moreover, outside of commodity-related bonds, junk looks to be “fairly or richly valued,” he says.

Hire a pro. Treading cautiously makes sense in this environment. Osterweis Strategic Income (OSTIX, 7.6%) has held up relatively well in past downturns and should continue to limit losses if the high-yield market stumbles. Lead manager Carl Kaufman looks for businesses he believes are improving and are candidates for a ratings upgrade. Such discipline keeps him far away from the energy patch. (All prices and returns are as of March 31.)

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Vanguard High Yield Corporate (VWEHX, 5.6%), a member of the Kiplinger 25, sticks with debt in rating tiers just below investment grade. Its conservative stance should make it a better bet in a junk slump. For more income, go for iShares 0-5 Year High Yield Corporate Bond ETF (SHYG, $45, 6.6%). It owns bonds maturing in less than five years, limiting its interest-rate risk. Energy-related bonds make up nearly 9% of its assets. That could hurt results if the rally in oil prices falters.

Next: Master Limited Partnerships to Earn 5% - 11%

Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.