For Safety, Two Income Securities

Personally, I tend to be sort of a barbell investor. On one hand, I tend to be very aggressive on the growth side of the equation, running a concentrated portfolio of strong leading stocks during bull markets, and, of course, holding cash during bear markets.

However, I also spend a little time looking at other types of investments, especially in the income world. And in this area, I tend to look for safety; while there are undoubtedly opportunities for higher-yielding, higher-risk income investments, I try to find any unique-but-safe instruments that yield more than the current 1% (or less) found in money-market funds.

What have I recently found? Here are a couple of safe exchange-traded funds that recently piqued my interest; both of them pay dividends monthly.

The first is what I think of as a money-market alternative. It’s the PowerShares VRDO Tax-Free Weekly Portfolio (PVI); basically, it invests most of its money in variable rate demand obligation bonds, issued by municipalities. Its current annual yield is just 1.5% … although that’s free from federal taxes, so it would be like having a taxable fund yielding 2% to 2.25%, depending on your tax bracket. At the end of last year, all of the firm’s holdings were ranked either AAA (the highest ranking) or AA.

Moreover, the fund, which has been around since November 2007, has a remarkably stable net asset value. At month’s end, its NAV has always totaled between 25 and 25.06 per share! And the share price (it trades just like a stock) has also been stable, closing near 25 almost every day; even during last fall’s market mayhem, the lowest close was 24.6 before bouncing back within a couple of days.

If you have money that you’ve decided to just keep on the sideline for the next year or two (possibly you’re buying a house or for a child’s education), this could be a low-risk way of getting a bit more yield.

One that’s a bit higher up on the yield scale is the Vanguard Total Intermediate-Term Bond ETF (BIV). The company’s holdings, at the end of 2008, were very high quality – 58% were rated AAA (most of which are Treasuries and Agencies), 8% AA, and another 18% rated A. That leaves just 15% rated BBB or below. And, as the name suggests, its holdings are generally intermediate-term (five to 10 years in length).

The annual yield is currently in the 4% to 4.25% range, and it pays dividends monthly. Moreover, the fund, which has been around since April 2007, has a relatively stable NAV–it’s closed every month between 70 and 78.

There are smarter income investors than me, and undoubtedly, there are some outright bargains these days in the higher-yielding, junk bond, or commodity trust securities. But if you plan on making most of your money in growth stocks, but also want to safely earn a few extra bucks, consider some stable bond funds like PVI and BIV.

Comments

[notsosmart]

sure-that AAA rating is very trust worthy?

2009 Mar 08 10:46 AM

[nym]

"...the fund, which has been around since April 2007, has a relatively stable NAV–it’s closed every month between 70 and 78."
I.e., it has no record in a period of high inflation. I've been through this with Vanguard: as interest rates rise, the market value of their holdings declines - that's bonds for you. To maintain share price, they sell higher yielding holdings, which makes their yield decline. You've got to be one of the first to get out at turnaround, but can you recognize turnaround?

2009 Mar 08 01:25 PM

[BigOlDave]

...and, for some reason, none of your charts appear. But "nym" was right: this is a lousy time to be in this thing.

2009 Mar 08 05:37 PM

[William Cowie]

Or you could earn a cash dividend of 15% by buying preference shares in Host Hotels (HST), one of the safest and most conservative REITS. As low as risk goes, much better return. But only until something better comes along, of course...

2009 Mar 09 12:21 AM

[bearfund]

You MUST pair any intermediate bond holdings with PST or a direct short position in similar-duration Treasuries. The explosive expansion of the money supply and the risk of a hyperinflationary recovery are too great to take on that kind of duration without a hedge. But BIV holds a lot of Treasuries and Agencies, so you're better off with corporate-only bond funds that will reduce the cost of your hedge. Not to mention the fact that Treasuries are in a bubble of epic proportions.

2009 Mar 09 11:39 AM

[[e-mail]]

Actually most numbers suggest money supply has been contracting over the last month or two as the Fed has shrunk its b/s a bit - largely through a reduction in liquidity swaps but also by retreating from the CP market.

www.federalreserve.gov.../

This site attempts to recreate M3 measurements and it also shows a contraction.

www.nowandfutures.com/...


On Mar 09 11:39 AM bearfund wrote:

> You MUST pair any intermediate bond holdings with PST or a direct
> short position in similar-duration Treasuries. The explosive expansion
> of the money supply and the risk of a hyperinflationary recovery
> are too great to take on that kind of duration without a hedge.
> But BIV holds a lot of Treasuries and Agencies, so you're better
> off with corporate-only bond funds that will reduce the cost of your
> hedge. Not to mention the fact that Treasuries are in a bubble of
> epic proportions.

2009 Mar 09 12:10 PM

[buyitcheap]

MAB, BNY, MHE come to mind for those in Massachusetts or NY state. 6% state and fed tax free for Mass, even higher for NY'ers that's an after all-tax equivalent of 12-14%.

2009 Mar 09 12:51 PM

[donzelion]

Bearfund: Pairing a long treasury ETF with a short ETF like PST makes no sense over the long haul - the long ETF functions as advertised, but the short ETF can fall even as bonds fall, given tracking error/costs/leverage/e... For treasuries, if you think trouble looms ahead, either keep your money in cash or find a different asset class. It's best to play "Outsmart the hedge funds" when, like a hedge fund, you're playing with someone else's money.

Michael: I prefer BND to BIV. Yield and fees compare closely, but the broader mix of bonds should smooth things out if we get 1-3 years of craziness.

On Mar 09 11:39 AM bearfund wrote:

> You MUST pair any intermediate bond holdings with PST or a direct short position in similar-duration Treasuries. ..

2009 Mar 10 03:33 AM