Looking For Income? Some Timely Ideas
For now, steer clear of investments, such as CDs and Treasurys, that bet against inflation.
JUNE 12, 2009 by Brett Arends


Investors looking for yield right now are having a tough time of it.

What are your options?

Short-term savings rates are desperately low. The government is keeping official interest rates low to help stimulate the economy, and that feeds through to your bank or money market account. You can get 2.4% on a one-year certificate of deposit, according to Bankrate. But you are probably better off avoiding long-term lock-ins, and waiting for better opportunities.

Ten-year Treasurys yield about 3.8%, after briefly touching 4% this week. That's a lot better than a few months ago, but don't be fooled: It's still a gamble that inflation will stay low. You should really only buy these bonds if you are confident annual inflation will average less than 2% a year for the next 10 years (Otherwise, if you had to buy a ten-year Treasury bond, you'd buy the inflation-protected ones, known as TIPS, and lock in 1.9% plus the inflation rate.) If consumer prices surge, and they very well might, conventional Treasurys will fall in price and lose value in real terms.

Municipals may be bit more attractive than nominal Treasurys, especially for higher-rate income taxpayers. An exchange-traded fund like the SPDR Barclays Capital Municipal Bond fund (TFI) is yielding 3.84%, tax free. But you also have an inflation problem. Most of the fat yield comes from longer-term bonds, also at risk from rising prices.

Some municipals are slightly better. But anyone locking in long-term rates by purchasing a bond is taking a gamble that inflation will stay subdued. If it surges instead and rates climb, the bond will fall in price and the income from its coupon will lose buying power.

There are still opportunities in corporate bonds, where some yields still look attractive. Ten-year single-A corporate bonds, which are at the riskier end of investment grade, still yield about 6.8% on average. But you have to be selective, balancing the risks of default and inflation. A veteran fund like Loomis Sayles Bond (LSBDX), with a recent yield of 7.75%, is usually the low-stress way to do it.

Don't overlook the stock market. There are terrific shares out there with dividend yields beating 4%. There are opportunities in telecoms, oil and energy, pharmaceuticals, consumer staples and utilities. Among them: AT&T (T) yields 6.8%, London-based global mobile giant Vodafone (VOD), Pfizer (PFE) 4.3%, Merck (MRK) 6%, American Electric Power (AEP) 6.1%, Kimberly-Clark (KMB) 4.5%, Kraft (KFT) 4.4%. Other notables include Intel (INTC), yielding 3.4%, and London-based Diageo (DEO), maker of Smirnoff, Guinness and plenty of Scotch whisky, yielding 4.0%.

Obviously share prices are volatile -- you hardly need to be reminded of this, after the past 12 months -- and no dividends are guaranteed. They can be cut if profits are squeezed. On the other hand, they can also rise -- and you would expect that to happen if the economy, and inflation, picks up. If you don't want to pick individual stocks, but want a basket of them, funds that invest in shares with high dividend yields include Vanguard High Dividend Yield Index (VHDYX), and Eaton Vance Tax Advantaged Dividend Fund (EVT), a closed-end fund you buy like a share.