Dividends, Dividends, Dividends!

Although dividend yields from U.S. listed companies have declined over the past 40 years, we can still find a good handful of dividend yielding companies today. These companies not only have paid regular dividends for many years, but have also increased their dividend payouts consistently.

Research have shown, companies that pay regular dividends not only are able to survive much longer than their counterparts in the same industry, but have also seen their stock prices increase higher than companies that do not have a regular dividend payout policy.


Dividend Paying Mutual Funds

Before I put down any names, let me remind you that when buying Mutual Funds it is essential to find funds with low, or very low Expense Ratio. And also make sure that you buy funds, if possible with No Loading.

Here are 2 funds that are termed Balanced Funds. This is because these funds contain both Stocks and Bonds. Recent studies have found that Balanced Funds do significantly better than funds that are 100% investing in Equity, or funds that are 100% invested in Bonds.

• Vanguard Wellesley Income Fund (VWINX) - 4% Yield
• Berwyn Income Fund (BERIX) - 5% Yield

Both funds have an expense ratio lower than 1%.

Here are 3 BlackRock Closed-Ended Funds that pay dividends to consider:

• BlackRock Dividend Achievers Trust (BDV)
• BlackRock Strategic Dividend Acheivers Trust (BDT)
• BlackRock Enhanced Dividend Achievers Trust (BDJ)

*Take note though that both funds may withdraw capital to substantiate their dividend payment, because these funds aim at offering a consistent payout yield of around 6%.


Dividend oriented Exchange Traded Fund (ETF)

Nowadays ETFs are gaining a lot of popularity due to it's low management costs and stock-like characteristics.

Here are the most popular ETFs:

• iShares Dow Jones Select Dividend Index (DVY)

The Dow Jones Select Dividend Index contains 50 of the highest dividend paying stocks on the Dow Jones Index. The DJ Dividend Select Index is the most commonly used index to benchmark against.

For instance, you wanted to know whether you should invest in a particular stock and do not know whether the dividend yield is sufficient. You therefore look at the latest yield offered by DVY and if the stock you were contemplating to buy is offering a yield higher than the DJ Select Dividend Index, than it is considered a good income stock.

• Mergent Dividend Achievers (DAA)

Mergent selects companies that has made dividend payouts in the last 10 consecutive years. Mergent Dividend Achievers contain more than 300 stocks. There are a few funds under Mergent and also funds that traces the Mergent Dividend Achievers Indices, like the BlackRock Closed-Ended Funds already mentioned earlier.

Mergents offers 11 Dividend Achievers indices: six indices for U.S. stocks, one for international stocks, three for Canadian stocks and one index for U.S. and Canadian stocks:

• Achievers Select Index
• Dividend Achievers 50 Index
• High Growth Rate Dividend Achievers
• NASDAQ Dividend Achievers Index
• KLD Dividend Achievers Social Index
• International Dividend Achievers Index
• Canadian Dividend Achiever Index
• Canadian Dividend Achievers Select Index
• Mergent’s Canadian Dividend & Income Trust Achievers Index
• Mergent’s North American
• Dividend Achievers50 Index
• PowerShares Dividend Achievers Portfolio
• PowerShares High Growth Rate Dividend Achievers Portfolio
• PowerShares High Yield Equity Dividend Achievers Portfolio
• PowerShares International Dividend Achievers Portfolio
• Vanguard Dividend Appreciation Index Fund Investor Shares
• Vanguard Dividend Appreciation ETF
• Claymore CDN Dividend & Income Achievers ETF

• Standard & Poor's Dividend Aristocrats (SDY)

The S&P's Dividend Aristocrats portfolio goes one step further than the Mergent Dividend Achivers Index that it tracks and buys invests in companies that have increase dividends in the past 25 consecutive years.


Mix n' Match

If you wanted to have 'the best of both worlds' you may like to buy both the Dow Jones Select Dividend Index, which is a fund that contains the highest dividend paying companies, and combine your portfolio with a fund that contains reliable, long lasting dividend paying companies; such as the Standard & Poor's Dividend Aristocrats, or the Mergent Dividend Achievers.


Buying individual stocks

You may like to create your portfolio by buying into individual stocks. Investing in income stocks this way may be a costlier affair, but if you know which stocks to buy and by buying into them at a discount you may have a set of stocks that is yielding higher than the above mentioned indices.

Please do diversify your stocks in different sectors, and give equal weightings to each stock.

How do you find good high yielding stocks?

Well, take a look at the different funds mentioned, and build your own index based on them (If you are looking at buying foreign stocks, email: DiverseWealthAsia.com to find out more).

Of course, do remember to do your own research before buying into any stock. Besides researching on individual companies to buy, also look at the current economic condition, and business/sector cycle.

High Yield Bonds as part of your Income Portfolio

The following are some High Yield Bond Funds to consider. Please do your own research on these Funds to see whether they are still appropriate and worth investing into:

Municipal Bonds

Municipal Bonds, or 'Munis' have higher after-tax yields than taxable treasury and corporate bonds. If you buy 'Munis' in your home state, they are usaully tax free.

Here are some Municipal-Bond Funds worth looking into (take note these are leveraged Closed-Ended funds), that are categorize into National and Single State funds (Yields may have fluctuated higher or lower from the figures shown):

National

• BlackRock Ins. Muni Term 2010 (BMT) - 6% Yield
• BlackRock Ins. Muni Term 2008 (BRM) - 6% Yield
• Federated Premium Intermediate (FPT) - 5% Yield
• Eaton Vance Insured Muni (EIM) - 6% Yield
• Eaton Vance Insured Muni 2 (EIV) - 6% Yield

Single State

• Eaton Vance Michigan (MIW) - 6% Yield
• Eaton Vance New York (ENX) - 6% Yield
• Eaton Vance Pennsylvania (EIP) - 7% Yield
• Eaton Vance California (EVM) - 6% Yield
• Eaton Vance New Jersey (EMJ) - 6% Yield
• Eaton Vance Ohio (EIO) - 6% Yield

*Note: Usually there is no maturity on Bond Funds since the fund manager is always buying and selling these funds. The funds that are mentioned above on the other hand all have maturities, therefore they work like individual bonds. This removes the risk of fluctuating interest rates.


Foreign Bonds for your portfolio

Bonds that offer very high yields are usually Foreign and Emerging Market Bonds. Emerging Market Bonds are often referred to as 'Junk' bonds because of their low credit rating.



Foreign Bond Funds (especially Unhedged Foreign Bond) typically do well when the U.S. dollar is falling against the local currency. An Unhedged Foreign Bond Fund to consider is the Aberdeen Global Income (Closed-Ended) Fund, which invests in stable foreign bonds from Australia, Canada, New Zealand and U.K. This fund offers a Yield close to 6%.


Riskier and Highest Yielding Bonds - Emerging Market Bonds

You may want to place some money in these Emerging Bond Funds. Emerging Bond Funds offer excellent yield, but there are dangers default risk. So, invest in these type of bonds only with money that your can afford to lose. Here are some better Emerging Bond Funds to consider. These funds short maturities, lower expenses ratios, and high credit quality:

Open-Ended Funds

• Fidelity New Market Income (FNMIX) - 6% Yield
• T. Rowe Price Emerging Market Bond (PREMX) 6% Yield

Closed-Ended Funds

• Global High Income Dollar Fund (GHI) - 11% Yield
• Morgan Stanley Emerging Markets Debt (MSD) - 8% Yield
• Saloman Emerging Markets Income II (EDF) - 7% Yield
• Saloman Emerging Markets Income Float (EFL) - 8% Yield
• Scudder Global High Income (LBF) - 7% Yield
• Templeton Emerging Markets Income (TEI) 8% Yield

The reason I don't mention U.S. Government or Corporate Bonds, and other High Credit Rating bonds is that their yields are disappointingly low. With inflation hovering around 5% annually, these 'safe' bonds can never match up with average yields as low as 3%.

If you really want some 'safer' bond recommendations, take a look at the following:


Short-Term Government Bond Funds

• Excelsior Short-Term Government (UMGVX) - 3% Yield
• Payden U.S. Government (PYUSX) - 2% Yield
• Vanguard Short-Term Federal (VSGBX) - 3% Yield

More Short-Term Bond Funds

• Constellation CIP Short Duration Fixed Income (TSDGX) - 3% Yield
• Constellation CIP UltraShort - 2% Yield
• Fidelity Short-Term Bond (FSHBX) - 2% Yield
• Harbor Short Duration (HASDX) - 3% Yield
• Payden Short Bond Fund (PYSBX) - 2% Yield
• Schwab Short-Term Bond (SWBDX) - 3% Yield
• Schwab Yield Plus (SWYPX) - 3% Yield
• TIAA-CREF Short-Term Bond (TCSTX) - 3% Yield
• USAA Short-Term Bond (USSBX) - 3% Yield
• iShares Lehman 1-3 Year Treasury (SHY) - 2% Yield
• Vanguard Short-Term Treasury Bond (VFISX) - 3% Yield
• Vanguard Short-Term Bond Index (VBISX) - 3% Yield
• Vanguard Short-Term Inv. Grade Bond (VFSTX) - 4% Yield

Treasury Inflation-Protected Securities (TIPS) Funds

• American Century Inflation Bond (ACITX) - 4% Yield
• iShares Inflation-Protected Securities (TIP)* - 5% Yield
• TIAA-CREF Inflation-Linked Bond (TCILX) - 4% Yield
• Vanguard Inflation-Protected Securities (VIPSX) - 4% Yield

*iShare's TIP fund is a popular fund for investors looking to invest in TIPS.


Medium-Term Bond Funds

• Dodge & Cox Income (DODIX) - 4% Yield
• Fidelity Intermediate Bond (FTHRX) - 3% Yield
• iShares Lehman Brothers Aggregate (AGG) - 4% Yield
• Schwab Total Bond Market Index (SWLBX) - 3% Yield
• TIAA-CREF Bond Plus (TIPBX) - 4% Yield
• T. Rowe Price U.S. Bond Index (PBDIX) - 4% Yield
• USAA Income (USAIX) - 5% Yield
• Vanguard Int.-Term Inv. Grade Bond (VFICX) - 5% Yield
• Vanguard Int.-Term Bond Index (VBIIX) - 5% Yield
• Vanguard Int.-Term Treasury (VFITX) - 4% Yield
• Vanguard Total Bond Market Index (VBMFX) - 4% Yield

More Municipal Bond Funds to consider:

• Fidelity Spartan Short-Term Muni (FSTFX) - 3% Yield
• Fidelity Spartan Int.-Term Muni (FLTMX) - 4% Yield
• USAA Tax-Exempt Short (USSTX) - 3% Yield
• USAA Tax-Exempt Int.Term (USATX) - 4% Yield
• Vanguard Ltd.-Term Tax Exempt (VMLTX) - 3% Yield
• Vanguard Int.-Term Tax Exempt (VWITX) - 4% Yield
• Vanguard Short-Term Tax Exempt (VWSTX) - 2% Yield

Mortgage-Backed Bonds

The following are some Mortgage-backed, or Mortgage related bond funds. With the current Sub-Prime lending problems hurting Mortgage Corporations/Asscociations like Freddie Mac and Fannie Mae, I suggest you carefully do your homework before you invest in these instruments.


Mortgage Security Funds

• Dreyfus U.S. Mortgage Securities (DIGFX) - 5% Yield
• Fidelity Mortgage Securities (FMSFX) - 3% Yield

Some Ginnie Mae (Government National Mortgage Association) Bond Funds

• Fidelity GNMA (FGMNX) - 4% Yield
• Payden GNMA (PYGNX) - 6% Yield
• T. Rowe Price GNMA (PRGMX) - 4% Yield
• USAA GNMA (USGNX) - 5% Yield
• Vanguard GNMA (VFIIX) - 5% Yield

The main source of investment income in the past - BONDS

When people speak of income investing they usually associate it with Fixed Income investments, or Bonds. Although bonds were heavily used for income in the past, they are slowly beginning to get out of favour nowadays due to the trend of decreasing interest rates. Don't get me wrong, Bonds are still a good source of steady income, and are less votatile than stocks.

We all know the inverse proportionality affecting Bond prices against interest rates. There are few risks associated with Bonds, namely: Interest Rate Risk, Credit Risk, Purchasing Power Risk, Marketability Risk, Liquidity Risk, Reinvestment Risk, Call and Event risk etc.

But the risks that affects Bond investors the most today is Interest Rate Risk, Purchasing Power Risk and Reinvestment Risk.

To put it simply, Interest Rate Risk is the risk that the bond(s) that you are holding prices drop due to an increase in interest rates. The bond(s) that you hold will be less attractive than the newer offered bonds, as a result you will need to sell your bond at a discount to the par price. But this would not affect those who hold their bonds to maturity.

Purchasing Power Risk is the risk you battle with inflation. For example, the $1000 bond you bought today may be valued at only $940 when it matures. Therefore, if the yield of the bond isn't high enough, inflation will erode away any profits gained, or worst still cuts into the amount you paid for the bond.

Thirdly, Reinvestment Risk. Reinvestment Risk is a common risk Fixed Income investors faced when they are not able to reinvest their bond(s) at an interest rate similar to or higher than the earlier bond(s).

Here are some suggestions on how to cope with Bond Risks:

• Interest Rate Risk: Buy Short-Term maturity bonds, Laddering.
• Purchasing Power Risk: Buy TIPS, Short-Term maturity bonds.
• Reinvestment Risk: Longer Maturity bonds.

*Remember to diversify your bond investments.

Why do we investing in income securities and stocks?

The stock market has been more volatile than ever before. We do not know how high our stocks will appreciate in price. Therefore you can see that we are betting on the stock market to rise in price so that we can sell the stock for a profit. Unless you are a trader and loves speculation, buying a holding stocks for the long run may be longer than you think.

That is why income investors invest in income producing stocks and securities, to capitalize on the steady income that income oriented securities offers, and may also benefit on capital gain.

Where do you invest to get good yield and constant income?

There are primarily 12 main areas where you can invest to receive high constant income. The are:

1. REITS
2. Shipping Trusts
3. Canadian Royalty Trusts
4. Canadian Business Trusts
5. Business Development Companies
6. Closed-Ended Funds
7. Master Limited Partnerships (MLPs)
8. Income Deposit Securities
9. Convertible Securities
10. High Yield Common Stocks
11. Preferred Stocks
12 High Yield Bonds