Compounding Divdends

Since the Markets bottomed in March 2009, we've had a nice recovery in both stocks and bonds. Both have advanced around 40% off their lows. Of the two, my favorite long term investment right now would be High Yield Bond funds.

In spite of the rise, High Yield bonds are still attractively priced and yielding over 10%. The easiest way to own these are with ETFs (exchange trades funds) and CEFs (closed end funds).

You could buy mutual funds, but I prefer both ETFs and CEFs over Mutual funds, because they trade all day and can often be purchased at a discount to actual value. Purchasing funds at a discount increases your yield and lowers risk; two things we should always be concerned with.


Three examples I own: JNK, HYG and HYV

Barclays Capital High Yield Bond ETF (JNK) is paying over 14%.
iShares iBoxx $ High Yield Corporate Bond Fund (HYG) is paying 11%.
BlackRock Corporate High Yield Fund V, Inc. (HYV) is paying 13% and selling at a 7% discount.

Things can change, dividends could be reduced, but I believe these are worth owning and in my opinion will beat the stock market over the next few years.

If you purchase these, and don't need the income right away you should consider having your dividends automatically re-invested allowing your investment to compound. Just tell your broker you would like the dividends re-invested.

I would not recommend buying individual high yield bonds. These require knowledge and research capabilities beyond the average investor, myself included and I believe funds or ETFs are a safer, more practical way for individual investors to participate.

As always, you should do your own research to become familiar with these or other investments before putting your money at risk.