High-Yield Bond Funds for the Current Environment

 | Feb 24, 2018 | 2:00 PM EST
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In the scheme of things, Jeffrey DeMaso, the co-editor of the Independent Adviser for Vanguard Investors newsletter, said income-seeking investors are best served focusing on total return, not just income.

That said, DeMaso believes that income investors should welcome the current rise in interest rates.

Why so? "It means they'll start to earn more income," said DeMaso. "Yes, rising interest rates initially lead to a decline in bond prices, but it also means investors start earning more income which will eventually make up for the initial decline in prices."

Granted, given how low interest rates are today, he expects the recovery time will be more drawn out for income investors than in the past. "That said, if you are just an income investor, you shouldn't be paying that much attention to the value of the position," DeMaso said.

So, for investors looking for income today, DeMaso likes high-yield bonds. Granted, the 5.23% yield on the Vanguard High-Yield Corporate Fund (VWEHX) isn't "high" today, but it is more than double what Vanguard Intermediate-Term Treasury Fund (VFITX) is yielding. "Plus, if interest rates are rising because the economy is heating up, well, that's typically a good environment for high yield bonds," he said.

In two recent issues of the Independent Adviser for Vanguard Investors, DeMaso examined what's been the best investment for an income investor at Vanguard. "The short answer is that if you need consistent, predictable income today, high yield is tough to beat," he said. "But if you're looking for income over 20-plus years, then some income-producing stocks make sense."

Vanguard's highest-yielding bond funds are High-Yield Corporate and Vanguard High-Yield Tax-Exempt Fund (VWAHX) .

This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Robert Powell, Peter Tchir and others.

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