Our 2012 High-Yield, No-Stocks, Tofurky Portfolio

Elections, hurricanes, soap operas at the CIA -- hey, you can be forgiven if Thanksgiving sneaked up on you. But we haven't forgotten one of Kiplinger's favorite holiday traditions -- the common-stock-free high-income investment portfolio we call Tofurky, after the soy-and-tofu ersatz turkey roast. We're trying to serve up the high returns and generous dividends of stocks but without any common stocks (preferreds, partnerships, real estate investment trusts , and limited liability companies are okay). Given that stock prices are limping as we write this, we suspect there's an appetite for this concoction.

We change the recipe annually, and the suggestions below differ from last year's Tofurky formula. That one didn't work out badly, though: From the beginning of the year through November 15, it turned every $1 into $1.10, with only two of the 12 investments making a loss.

We've learned a couple of lessons from last year. Bonds and preferred stocks are in fine shape, but one of our favorite go-to income investments, BP Prudhoe Bay Royalty Trust (symbol BPT), is losing money -- down 26% for the year through November 20 -- as the price of domestic crude oil fell to the lowest levels for a couple of years and forced the trust to cut dividends. When gas is over $4 a gallon in much of the nation, BPT is a keeper. When it trends toward $3, take a break on BPT and find another way to turn oil into income. We're substituting a limited liability company called Vanguard Natural Resources.

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The rest of the portfolio scarcely can be improved. So, here goes. The current yield on the whole as we get ready for Thanksgiving dinner is 4.7%.

Domestic bonds: 30%

We doubt bond prices will rise sharply again in 2013 as in 2012, because interest rates cannot keep dropping much more or they'll go to zero. (When rates fall, bonds gain in value, because an old bond is more desirable than a new one that pays you less interest.) But our three bond bellwethers are certainly worth keeping, as 10% each of the portfolio: the closed-end DWS Municipal Income (KTF) for municipals, mutual fund Fidelity Capital & Income (FAGIX) for high-yield, and then iShares iBoxx Investment Grade Corporate Bond ETF (LQD), an ETF. The trio's distribution yields are 5.5%, 5.5% and 3.7% respectively. (All yields are as of November 20.)

Energy: 20%

Oil's getting cheaper, and natural gas is cheap, but the business of finding the stuff, moving it, and preparing it for the consumer is strong. Pipeline and storage partnership Magellan Midstream Partners (MMP) is a keeper for 10% of the whole. Pair that with Vanguard Natural Resources LLC (VNR), which gets you the exploration and production side and still a good yield because it's a limited liability company. MMP yields 4.5% and Vanguard (no connection with the mutual fund company) yields 8.8%.

Preferred stocks: 15%

With interest rates steady but the payouts on these high-quality hybrid securities often a good 7% or more, we're bumping up the allocation here from 10% to 15%. The best way to buy preferreds in a package is iShares S&P U.S. Preferred Stock ETF (PFF), which yields 6.4% (its SEC yield 6.5%).

Foreign bonds: 10%

So many overseas bonds are winning credit upgrades and paying good yields that we're tempted to push this category beyond 10%. Maybe next year. Fidelity New Markets Income (FNMIX) covers the emerging markets, while T. Rowe Price International Bond (RPIBX) concentrates on Japan and Europe. The funds yield 4.5% and 2.4% (with SEC yields of 4.1% and 1.6%) respectively.

Bank loans: 10%

Fidelity Floating Rate High Income (FFRHX) is one of our all-time favorites. It owns pieces of syndicated bank loans and credit lines for corporations and does it with no load and low costs. The yield is 3.2% (with an SEC yield of 3.0%).

Mortgages: 10%

Time to get safety-conscious here and stick to government-guaranteed Ginnie Mae securities, pools of federally guaranteed home loans. Because of extraordinary Federal Reserve buying of such mortgages, the yields on GNMA funds are falling, but not so much that we would avoid them in favor of CDs or money-market funds. There are many good GNMA funds, but we've usually gone with Vanguard GNMA (VFIIX) because of its rock-bottom expenses. The latest yield is 2.5% (SEC yield: 2.4%).

Cash 5%

Cash still doesn't yield anything, but it's good to have it on tap for scooping up cheap assets. You might even want to buy stocks if the November selling continues into December.

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