Federal Reserve Chairman Ben Bernanke is absolutely adamant about going into a deflationary spiral, and backs up his word by saying that rates will stay at the ultra-low 0-0.25% rate for at least another two years. That's fantastic for borrowers, but absolutely hammers the savers and people reliant on a fixed income using CDs, savings accounts, and other secure forms of fixed savings. Therefore, I think it's wise and actually necessary to search for a higher yield, because the real return will eat into the prinicipal rather quickly as fuel, food, tuition for the kids and grandchildren, etc. grow at a far faster rate than the approximate 1% returns these common forms of savings give. We can look for high-yielding stocks or seek extra income by selling covered calls. Here are some exchange-traded funds and dividend-paying stocks to consider.
I currently own the SPDR Barclays Capital High Yield bond ETF (JNK), and what really is enticing right away is its 8%+ dividend yield, paid monthly. There is, of course, risk, as the fund normally invests at least 80% of its assets in non-investment-grade bonds, but I believe a person is getting paid very well for that risk when the spread is 600+ basis points above the 10-year Treasury bond. Moreover, the underlying companies that sell these bonds are having near-record-low defaults, even after the bleak economic times of the last four years. The fund is well-diversified, as demonstrated by its ten largest holdings compromising just over 20% of the portfolio.
The iShares High Yield Corporate Bond Index (HYG) has a very similar make-up, as its yield is just over 8%+ paid monthly as well, and well-diversified as well with its ten largest holdings only compromising just over 10% of the portfolio. I feel confident recommending them both to the long-term dividend-seeker at current price levels.
The iShare Select Dividend Index (DVY) is for the more conservative investor, but still gives a considerable 3.8% dividend yield, paid quarterly. The fund simply looks to mimic the Dow Jones U.S. Select Dividend Index by having at least 90% of its assets in securities that index comprises, such as Chevron (CVX) and McDonald's (MCD). It is well-diversified, as shown by its top 10 holdings making up less than 25% of the total portfolio. I think this is a good buy here; if you're looking for individual names, you can find some here that make up part of DVY's holdings.
Some energy limited partnerships have caught my eye, as their dividends look very generous, and more importantly, secure. Martin Midstream Partners (MMLP) is currently around 9%, and has been raising its dividend since going public in 2003. Linn Energy (LINE), named for its very competent CEO, Michael Linn, has a fantastic management team that hedged almost all of its natural gas prices a few years back, and therefore looks to have a very secure 7.4% dividend going forward for the next few years. The dividend has not only been maintained, but raised every year since going public in 2006. I think it's a solid buy here.
At the beginning of 2011, Canadian independent oil and gas producer Enerplus (ERF) became a corporation, and as such has different tax ramifications that, as always, you should discuss with your tax professional before investing. Nonetheless, this monthly dividend-payer has a yield just under 8%, and while it has not raised its dividend as consistently as the previous two mentioned, its still looks secure with its strong free cash flow. This is a good buy at this price level.
Magellan Midstream (MMP) has the same great, consistent history of raising dividends since going public in 2001, and currently sports a 5% quarterly dividend. Even though it’s trading right near its highs, it still offers some great secure income and is trading at reasonable valuations.
Finally, I would be remiss by leaving out the biggest one of them all, which also has great value, Enterprise Products Partners (EPD). Since going public in 1998, it has raised its dividend consistently and now sports a yield just under 5.5%. This is a buy here at these levels.
Disclosure: I am long JNK.