High-yield bond funds offer good cash flow
It seems that all the attention is focused on income trusts these days. But there are many other options for yield-hungry investors, and a well-balanced portfolio should include them for diversification.
One mutual fund category that’s worth a look is look is high-yield bonds. As a group, these funds have scored some impressive returns lately. For the year to June 30, the average fund of this type gained 12.6%, making this one of the most productive investment categories during that period.
However, that type of gain is not typical, nor is likely to continue. Over three years, the average high-yield bond fund gained a much more modest 4.7% annually, which is more along the lines of what you might expect over time.
The real long-term attraction of these funds is cash flow, which tends to be higher than that from a regular bond fund. During low interest rate times such as these, a high-yield bond fund that provides regular distributions is a useful additional to any income-oriented portfolio. Here are two worth considering.
Standard Life Corporate High-Yield Bond Fund. This fund has been listed as a “Prosing Newcomer” in the past two editions of my annual Buyer’s Guide to Mutual Funds. It recently passed its third birthday, so it now qualifies for a formal rating, and I’m giving it $$$ (out of four). Although this is a high-yield fund, it is much more selective about the securities it buys than many others in the category. Only bonds with a rating of at least BBB qualify for inclusion (the TD fund that follows will hold issues as low as B rating). That reduces the risk of default significantly and the fund’s excellent safety rating is testimony to that. The offset is that higher-rated bonds don’t pay as much interest so the returns here may be somewhat reduced. Nonetheless, they’re pretty good. Over the year to June 30, the fund gained 15.1% and the three-year average annual return of 7.5% is second-best in the category. Distributions are paid quarterly and the fund is yielding 4.1% based on the current price. This is a good choice for those who want a more safety in a high-yield fund. Consider it for a RRIF.
TD High Yield Income Fund. I have been quite impressed with the income funds offered by TD, and this is another feather in their cap. The fund’s mandate allows it to invest in high-yield government and corporate bonds, domestic or foreign, rated B or better by a recognized rating service. Right now, the portfolio is almost exclusively in corporate issues from such companies as Rogers Communications, Stelco, Bombardier, and Telus. Results have been very good. Over the year to June 30, the fund gained 18.3%, well above average for the category. Three-year average annual compound rate of return was also above average, at 6.7%. Risk is about on a par with the rest of the high-yield bond peer group. Distributions are paid monthly and the current annualized cash-on-cash yield is 7.3%. The fund is no-load and has a minimum initial investment of $1,000 (only $100 if you buy it for an RRSP or RRIF). Just two caveats. There is more risk here than in the Standard Life fund and, unlike most high-yield bond funds, this one is classified as foreign content in registered plans.
Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that offers practical advice on portfolio building and fund selection for investors. For subscription information: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=80