Banking & Finance

Dividend Alternatives From High Yield Funds (HYG, JNK, PHIGX, USHYX, DVHYX, HIO, DHF, HYT)

We have been screening our universe of the high-yield dividends for investors now that investors are growing more concerned each day and each week.   Now we are looking at junk bond fund alternatives for those who want high yields for income yet still want the possible upside from appreciation through time.  This category of securities consists of debt that is “Junk Rated” under the investment grades of “BBB/Baa,” but can also include convertible securities and preferred stock.  Individually these all are risky in nature, but investing in mutual funds, open-end and closed-end, as well as ETFs are a way to significantly cut the risks for investors by eliminating default risk of any one or a small group of issuers.  These securities are also higher up in the creditor food chain than the common stock if investors ever get too worried about economic viability.

We have screened out several high-yield securities classes and several liquid names for each. iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) and SPDR Barclays Capital High Yield Bond (NYSE: JNK) are two of the more liquid and common go-to exchange-traded products for investors looking for ETFs and ETNs in the high-yield universe. In the open-end mutual funds, these are ranked the highest by Zacks with a “#1 Rank” that are also considered a Strong Buy analyst rating which implies that they will outperform peers. Some of the top open-ended mutual funds screened by Zacks were Putnam High Yield A (PHIGX), USAA High-Yield Opportunities (USHYX), and Transamerica Partners High Yield Bond (DVHYX).  In the closed-end universe, we have shown the examples of Western Asset High Income Opportunity Fund Inc. (NYSE: HIO), Dreyfus High Yield Strategies Fund (NYSE: DHF), and BlackRock Corporate High Yield Fund VI, Inc. (NYSE: HYT).

iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) aims to track the results of the price and yield performance, before fees and expenses, of the iBoxx $ Liquid High Yield index. The fund invests at least 90% of assets in securities that comprise the index, but it may invest up to 20% of assets in certain futures, options and swaps, cash and cash equivalents, and in bonds not included within the index.  With a price of $90.59, the dividends fluctuate monthly but the yield is actually well above 7% and is up almost 5% so far this year.

Another popular high-yield ETF is one with most appropriate ticker of them all… SPDR Barclays Capital High Yield Bond (NYSE: JNK) seeks to track the Barclays Capital High Yield Very Liquid Index and it invests at least 80% of total assets in securities that comprise its benchmark index.  With shares around $40.00, its trailing 12-month dividend profile is close to 8% in yield.

Putnam High Yield A (PHIGX) mostly invests in Junk-rated securities with maturity periods of three years or more. The fund may also utilize futures, options, warrants and swaps to minimize risk or to enhance portfolio returns. This high yield mutual fund returned 13.01% over the last one year period. This fund also carries an expense ratio of 1.04% compared to a category average of 1.18%.

USAA High-Yield Opportunities (USHYX) has a primary objective of high current income with a secondary objective of capital appreciation. At least 80% of its assets have to go into high-yield securities such as bonds, convertible securities and preferred stocks. The high yield mutual fund has a three year annualized return of 12.02%.  Zacks noted that this fund actually held some 482 issues, with 6.88% of its total assets invested in iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG).

Transamerica Partners High Yield Bond (DVHYX) has a primary objective of high current income and it invests in high-yield debt securities and preferred stocks. Zacks noted that the mutual fund has a ten year annualized return of 8.43% and it has an expense ratio of 1.10% compared to a category average of 1.18%.

There is also the world of closed-end funds, where investors get some of the same characteristics of open-end mutual funds along with some characteristics of ETFs.  Unfortunately, or fortunately, there is also the risk and reward of constant premiums or discounts to net asset values.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) is one such closed-end fund.  Its current payout comes to an annualized yield of about 8.4%.  At $6.42, its 52-week range is $5.80 to $6.63, and its most recent premium to its net asset value was just over 2%.

Dreyfus High Yield Strategies Fund (NYSE: DHF) is a liquid closed-end fund with the example of a high premium over its net asset value.  At $5.05, its 52-week range is $4.01 to $5.14, and it trades at a premium close to 19%.  For such a premium, investors get a current payout rate close to 10% in yield.

BlackRock Corporate High Yield Fund VI, Inc. (NYSE: HYT) is another liquid closed-end fund that trades at a discount of close to 3% from its net asset value.  At $11.94, its 52-week range is $10.37 to $12.23, and its current payout generates a yield of close to 8.2%.

Many of these funds and ETFs are allowed to use leverage, or they can invest in “alternatives” other than just corporate debt.  If you broke out any individual security owned by these funds you will find almost none suitable for widows and orphans.  When you package these together, let’s just say that it takes several standard deviation events before the default rates start to eat heavily into those dividend yields.  Most importantly, please remember our most common investment mantra… “Regardless of what your objective, know what you are investing in.”

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JON C. OGG