Four High Yield Fund Types to Consider to Boost Your Income
Whether you're planning for retirement, seeking to increase your income, or simply looking for safer investment options, high-yield funds might be just what you need. As interest rates fluctuate, these funds become increasingly attractive, offering opportunities to secure higher returns compared to traditional savings accounts or CDs. In this post, we’ll explore four types of income-generating funds: High Yield Bond Funds, Floating Rate Funds, Dividend Stocks, and Derivative Income Funds.
High Yield Bond Funds
High Yield Bond Funds, often called "junk bonds," consist of bonds issued by companies with lower credit ratings. While these bonds carry a higher risk of default than investment-grade bonds, diversification within the fund helps mitigate this risk. Additionally, funds can manage risk by holding shorter-duration bonds, as shorter-term bonds typically have a lower default risk. Currently, yields for these funds range between 6% and 8%, making them an appealing option for income-focused investors.
Floating Rate Funds
Floating Rate Funds offer a balance between risk and return, often considered safer than stocks but still carrying some level of risk. These funds may include corporate loans, preferred stock, and even mortgages, all of which are sensitive to interest rate changes. As rates decrease, yields may also decline, but at present, Floating Rate Funds are offering yields between 7% and 8.5%. This makes them a competitive choice for those seeking income with a bit more stability than the stock market can offer.
Dividend Stocks
Dividend Stocks, also known as Value Funds, are a cornerstone of many portfolios. These funds invest in well-established companies with positive cash flows, paying out dividends as a share of the profits. Although still subject to stock market risks, dividend stocks typically perform better during market downturns compared to growth stocks. For instance, in 2022, growth stocks suffered a loss of 29.4%, while value stocks only declined by 5.2%, according to Merrill Edge. Dividend yields vary widely, from 3% to 7%, but it’s essential to consider the total return of the fund, not just the dividend yield.
Derivative Income Funds
Derivative Income Funds are a more complex but potentially rewarding option for generating income. These funds employ strategies like “covered call options” to hedge against risk. For example, a fund might hold stocks from the Nasdaq 100 and sell call options at a higher strike price. If the stock price rises above the strike price, the fund sells the stock for a profit. If the stock doesn’t reach the strike price, the fund keeps the premium from the call option, providing some downside protection. Yields on these funds can vary significantly, ranging from 5% to as high as 11%.
Why Consider High-Yield Funds?
Incorporating income-producing funds into your portfolio can be a smart strategy, even if you have a long-term investment horizon. These funds not only offer the potential for higher returns but can also provide a steady income stream during periods of market volatility.
If you're interested in exploring how these funds can enhance your financial journey, let's set up a call today to discuss your options.