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Let Me Show You Where the High Yields Live

June 27, 2019

With US Treasuries down in yield, many investors are giving up on finding greater opportunities for income. After all, the 2-year Treasury yields 1.74%, and the 10-year yields only slightly more at 2.01%. Even the long-term 30-year provides a scant yield of 2.53%.

However, there are still plenty of opportunities if you get to know more about the fixed income markets, which are more diverse than the stock market.

First, let’s see how we got to our current market conditions, and then I’ll show you where you can still get high yields and solid growth.

In 2018, there was a big fear that interest rates in the US market were set to soar. In fact, in the first quarter, the fear of the Federal Reserve tightening money supply sent bonds and stocks into a tailspin.

But the Fed’s Open Market Committee (FOMC) was measured in adjusting its target range for the federal funds rate and managing of its bond portfolio built up in the wake of the 2007-2008 financial mess.

Meanwhile, inflation is nowhere to be found in the US. The core Personal Consumption Expenditure Index (PCE), which the Fed uses to track broad inflation in all consumer spending, remains below the 2% level that the Fed would like to see. And the PCE remains on a very low trajectory. That’s why the Fed is now gearing up to actually ease monetary policy.

Personal Consumption Expenditure Index (PCE)—Source: Bloomberg Finance, L.P.

This is good news for the bond market. Add in the buoyant economy that continues to expand, and credit conditions for bond issuers are getting better for everything from US Treasuries to US corporate bonds.

So where can fixed-income investors make money and earn more income in this low-rate environment?

The best opportunity is in lower-grade corporate IOUs—paper rated below “investment grade,” but not the junkiest of the junk. Yields are higher than you can earn on Treasury debt of the same maturity. And if the yield spread contracts, you may be able to pocket a capital gain, too (from rising bond prices).

Bloomberg Barclays High-Yield Bond Total Return Index—Source: Bloomberg Finance, L.P.

This has been a great area for income investors because if you focus too heavily on Treasuries or Aaa/AAA bonds, you’re buying bonds that are priced for credit perfection. It’s like buying a stock that looks great but has reached the pinnacle of market price, with nowhere to go but down.

Instead, I look at bonds the same way I look at stocks. I want to buy bonds that have issuers that have lower credit ratings, but have proven they can service the debt, in the same way that I want to buy stocks that have lots of untapped potential profits that the market hasn’t yet priced in.

One of the best ways to step into the higher-yield bond market is through an easy-to-buy exchange traded fund (ETF) that tracks the Bloomberg Barclays High-Yield Bond Index: The SPDR Bloomberg Barclays High-Yield Bond ETF (JNK).

The ETF has exposure to a diverse collection of US corporate bonds paying higher yields that have been performing well. And given the underlying market conditions of the US market, they should continue to do so moving forward.

The ETF has been a great performer since the high-yield bond market began its ascent in 2016, with a total return of 31.10%.

SPDR Bloomberg Barclays High-Yield Bond ETF (JNK) Total Return—Source: Bloomberg Finance, L.P.

And while you own the ETF, you’ll enjoy a monthly dividend distribution that is yielding 5.60%—much higher than Treasury market yields. Over the trailing 12 months, the dividend distributions have been climbing by 3.72%.

Investors looking to take a position the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK) should ideally do so in a tax-free account.

All My Best,

Neil George

PS—While I’ve made the case for a better way to reinvest dividends in this Digest, members of my Profitable Investing advisory receive specific recommendations as to the best buying opportunities on our dividend-paying stocks in order to maximize returns.

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