Our High-Yield, No-Stocks Tofurky Portfolio

The 392 dividend payers in Standard & Poor’s 500-stock index yield, on average, a bit less than 3%. A few, such as AT&T, pay close to 6%. Pretty tempting, considering that ten-year Treasuries yield 2.1% and that cash pays nothing. Trouble is, the stock market is looking more like a casino and less like an efficient arbiter of what companies are really worth. So if you’re, say, a retiree looking to supplement pension income, you’re trapped between the proverbial rock and hard place: a Federal Reserve bent on keeping interest rates micro­scopic for some time and Wall Street’s obsession with stocks as poker chips.

Is there a solution for this dilemma? How about Tofurky? For several years, I’ve produced a holiday-season portfolio that I named after the ersatz soy-and-tofu turkey roast. A Tofurky portfolio cooks up income and some growth without using any common stocks. Instead, the portfolio includes bonds and stuff like oil wells, pipelines, mortgages and bank loans. Yes, all of these investments can lose value, but in general they tend to be far less volatile than the stock market. As a whole, the portfolio described below yields 5.7%. Here’s the recipe:

Assorted Bonds: 30%

Split this money among a closed-end municipal bond fund (see CASH IN HAND: Amazing Tax-Free Income From Closed-End Muni Bond Funds), a high-yield bond fund and a high-quality corporate bond fund. Examples include DWS Municipal Income Trust (symbol KTF), Fidelity Capital & Income (FAGIX) and iShares iBoxx Investment Grade Corporate Bond ETF (LQD). They yield 7.1%, 6.4% and 4.0%, respectively.

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Energy Pass-Throughs: 20%

Royalty trusts and master limited partnerships must pass along to shareholders almost all of the income they generate. A bedrock pick is BP Prudhoe Bay Royalty Trust (BPT), whose yield from Alaskan crude typically ranges from 9% to 12%. Pair it with a pipeline and storage-tank concern such as Magellan Midstream Partners (MMP), which yields 5.2%.

Preferred Stocks: 10%

An index of preferreds lost 8% in the third quarter, but that’s the first stumble in this category since the 2008 credit meltdown, and it’s reversible. My choice is iShares S&P U.S. Preferred Stock Index ETF (PFF), which yields 6.8%.

Foreign Bonds: 10%

The recent dollar rally cut the value of foreign debt in dollar terms, but that, too, can -- and almost surely will -- reverse. Use Wisdom Tree Emerging Markets Local Debt ETF (ELD), which owns short-to-medium-term government debt and yields 5.1%, and T. Rowe Price International Bond Fund (RPIBX). It owns corporate and government debt, mostly in Europe and Japan. It aims to hold down risk and so yields just 2.3%.

Bank Loans: 10%

Nervous investors dumped the kinds of adjustable-rate bank loans that Fidelity Floating Rate High Income (FFRHX) invests in, so the fund lost nearly 3% in the third quarter. The good news is that the fund’s yield is back up to 4.6%. Companies that take out floating-rate-loans are usually lower quality, but bank loans are at the top of the pecking order in case a company fails, so these loans are actually fairly safe.

Mortgages: 10%

Put half in safe Ginnie Maes, which are packages of government-backed mortgages. Vanguard GNMA (VFIIX) is as stable as they come and yields 3.3%. Put the other half in something riskier: a real estate investment trust that buys mortgages. My longtime favorite is Annaly Capital Management (NLY), which yields a fat 15.1%. Annaly experienced a rare slip in September, but that makes this unusual REIT more attractive, in my view.

Wild Card: 10%

I don’t find gold, Treasury bonds or crops attractively priced, so I suggest putting the final 10% in cash. It doesn’t yield anything, but it’s good to have on hand for scooping up assets that investors trash unfairly -- a common-enough occurrence.