15 Top Funds for Income Investors

Equity investors look to the Fed's next move and worry over rising rates. Income investors, however, can take solace as higher rates provide a long-overdue boost to potential returns. Below, five leading income specialists and contributors to MoneyShow.com each offer a package of three favorite funds that are well-positioned in a higher rate environment. Jim Pearce, Personal Finance We aren't quite there yet, but eventually the Fed will start easing off on rate hikes. When that happens, bond prices should stabilize and bond funds should be safe to own again. That is especially good news for retirees, many of whom require regular withdrawals from their investment accounts to make ends meet. The days of having to count on erratic stock market appreciation for their retirement income are numbered. Instead, they can move that money into a portfolio of diversified bond funds to provide steady income in retirement. Here are three that I like for that purpose. You can't get much more diversified than the Osterweis Strategic Income Fund . Its holdings include 149 different bonds and 7 stocks. The fund's objective is to preserve capital and attain long-term capital returns through a combination of current income and moderate capital appreciation. The fund has done that well. Since its inception 20 years ago, OSTIX has delivered an average annual total return of 5.7% compared to 3.2% for the Bloomberg U.S. Aggregate Bond Index. The fund pays dividends quarterly. Its most recent distribution of $0.12346 per share equates to a forward annual dividend yield of 4.9%. The fund holds $4.5 billion in total assets and has a gross expense ratio of 0.84%. For exposure outside of the United States, consider the Fidelity New Markets Income Fund . According to its sponsor, the fund is Normally investing at least 80% of assets in securities of issuers in emerging markets and other investments that are tied economically to emerging markets. As of September 30, roughly 32% of the debt held by this fund was issued in Latin America. Another 24% is from the Middle East while Africa accounts for 14% of the fund's total assets. The fund currently sports a distribution yield of 5.6%, which is considerably less than its 7.5% 30-day yield. That suggests that it is not sacrificing capital to enhance dividend payments. Dividends are paid monthly, and the total expense ratio is 0.8%. As its name suggests, the Invesco Variable Rate Preferred ETF owns variable rate bonds and other hybrid securities with floating interest rates. Energy companies account for 11% of the fund's assets while utilities comprise another 8%. All the securities held by the fund are rated BBB or lower by both S&P and Moody's, so credit risk is a potential issue for this fund. The fund's current distribution rate is 4.9% with a 12-month distribution rate of 5.3%. It pays distributions monthly and has a total expense ratio of 0.50%. To be sure, the value of these three funds can and will fluctuate. Their share prices may drop a bit more until the Fed is done raising interest rates, so dollar cost averaging could be an effective strategy over the next six months. Michael Foster, CEF Investor The current period reminds me of the early months of 2009, when green shoots were appearing in the economy and markets, but investors were still too scarred by the preceding plunge to get in. But those who did buy then -- around the bottom in early March 2009 -- have done very well. We've got a similar opportunity now. Lately, you've probably noticed various Fed members out making the media rounds, talking tough about the need for higher rates to beat inflation. Don't buy it. We see lower inflation ahead, a trend the Fed will have to start paying attention to. Here, I've lined up three CEFs for you to consider, ranging from conservative to more aggressive. Our more conservative pick is the Nuveen Dow 30 SM Dynamic Overwrite Fund , which owns the large caps in the Dow 30 index. So you're getting strong firms that have weathered difficult markets in the past, such as UnitedHealth Group , McDonald's and Visa . That gives us a level of safety, as these companies have the strong balance sheets and the revenue they need to face a recession. The other downside limiter is the fact that DIAX sells covered-call options. This is a low-risk strategy that provides income DIAX adds to its payout, which recently yielded 7.3%. The fund gets further downside protection (and upside potential) from its 4.5% discount to net asset value (NAV, or the assets in its portfolio). Overall, DIAX is one of the lowest-risk CEFs for stock exposure. The Liberty All-Star Growth Fund has outpaced the S&P 500 since the end of the 2008-2009 financial crisis. It holds large caps like Amazon , Alphabet and Berkshire Hathaway , plus a smattering of small- and midcap names, too. That outperformance has resulted in strong dividends, as USA bought and sold its portfolio and handed the profits over as a high dividend (current yield: 9.7%). In fact, USA has given shareholders steady payout increases, too. (The fund links its dividend to its portfolio performance, paying out 8% of its NAV per year. This gives it the flexibility to pick up oversold bargains when the opportunity arises). USA does trade at a slight (3%) premium to NAV, but it's traded at premium for most of the last three years, and often higher ones. That leaves USA fairly valued in light of its high-quality portfolio and potential for bigger payouts as stocks recover. For even more upside potential and bigger payouts, look to the 13.7%-yielding BlackRock Science and Technology Trust II . With a massive 17.4% discount to NAV, BSTZ has priced in just about every disastrous outcome for the economy that you could imagine. Its discount is now at levels unseen since the pandemic hit March 2020. There's little reason to think BSTZ should be as cheap now as it was in those dark days. BSTZ focuses on tech, which also bodes well, as the sector that's the most beaten-down in a selloff (tech, in the case of 2022) is often the one that leads the recovery. It also benefits from its manager, BlackRock, the world's largest investment firm, with $10 trillion in assets. BlackRock's size and deep connections in the tech sector give BSTZ's managers an unsurpassed level of insight into the stocks they buy. We're also getting access to BSTZ's extensive private equity investments, which are both unavailable to the general public and provide strong growth potential on their own. Rida Morwa, High Dividend Opportunities Managed by one of the best bond fund managers in the world, PIMCO Corporate & Income Opportunity Fund is a bond fund that has managed to outperform equity funds. I've bought PTY when it was expensive, I've bought it when it was cheap, I've bought in bull markets, bear markets, and even when the world was coming to an end. PIMCO has shown an ability to make refreshing lemonade out of lemons. When other institutions were dumping mortgages at fire-sale prices, PIMCO was snapping them up for pennies on the dollar. When distressed assets are going up for sale, more often than not, PIMCO is there shopping. Periods of distress have historically been opportunities that PIMCO has seized to buy cheap assets and outperform during the recovery. Overall, PTY is my go-to bond fund. Buy a little here, a bit more there, and my income stream keeps growing because my capital is in good hands. Cohen & Steers Quality Income Realty Fund is a great option to gain leveraged exposure to the REIT sector. In 2022, RQI has concentrated its portfolio on quality. RQI's top 10 holdings are a who's who of what we would consider blue chip REITs. RQI recognized that quality was on sale and bought hand over fist. Why are REITs out of favor? Interest rates. REITs tend to use a lot of leverage, so the market perceives rising interest rates as a threat to them. However, all of the REITs in RQI's top 10 have very strong balance sheets and spent much of 2020 and 2021 refinancing debt at historically low-interest rates. RQI itself also uses leverage, at approximately 30% of managed assets. RQI has shielded itself from higher rates with interest rate swaps, covering 81% of its debt. Royce Value Trust -- a set it and forget it closed-end income fund -- that has been around for a long time. Since November 1986, RVT has been investing in small-cap value stocks and beating its benchmark, the Russell 2000 index. Experienced investors know that outperforming the market, in the long run, is a very different beast than outperforming over a few years. When investing, the tortoise wins the race. Investors who don't take crazy risks, who aren't out there chasing the next big thing, will outperform as the years become decades. Royce Value has a variable distribution policy, paying out 1.75% of the rolling average of the prior four-quarters NAV. This variable distribution policy ensures that the fund pays out a reasonable amount relative to NAV and is not forced to sell at low prices. It also provides investors confidence that as the market recovers, they will receive a fair amount of the gains. Harry Domash, Dividend Detective With the overall market, at least as measured by the S&P 500, down around 15%, this has been a rough year for most mutual fund investors. However, not all mutual funds are in the red. Here are three mutual funds that have scored double-digit gains (not a typo) so far this year. What's more, they are not one-year wonders. All three have strong three- and five-year track records. And all three -- each no-load funds -- are easy to buy. Fidelity Global Commodity , based in Canada, mostly holds large-cap stocks involved in the energy, metals and agriculture industries. As of November 16, the fund had returned 24% year-to-date, and averaged 25% and 17% annually over the past three and five years. Biggest holdings included Exxon Mobil , Nutrien , Chevron , Archer-Daniels-Midland and CF Industries . Two on that top five list, Archer-Daniels-Midland and CF Industries, had been in the portfolio since April 2009. The most recent addition to the top five list, Nutrien, was added in January 2018. There is no minimum opening investment requirement for this fund. Despite its name, Auer Growth mostly holds small-cap, value-priced stocks. It's currently overweighting energy, basic materials, and industrial stocks. It has returned 18% year-to-date and averaged 26% and 14% annually over the past three and five years. Hardly buy and hold, the annual portfolio turnover rate is 150%. In fact, most of its current holdings have been in the portfolio less than one year. Current biggest holdings include Cross Country Healthcare , Continental Resources , Diamondback Energy , ON Semiconductor and D.R. Horton . Auer Growth requires a $2,000 opening investment. Fidelity Select Insurance holds large-cap, mostly value-priced insurance company stocks. It has returned 7% year-to-date, and averaged 14% and 12% annually, over three and five years. Turning over only 15% of its portfolio annually, Fidelity Select Insurance certainly falls into the buy and hold camp. Biggest holdings include March & McLennan , Travelers Companies , American International Group , Arthur J. Gallagher , and Progressive . Of those holdings, Travelers, added in May 2009, has been in the portfolio the longest, while Progressive, added in July 2019, is the most recent addition. No minimum opening investment required for this fund. Those are my ideas. As always, past performance doesn't necessarily predict future returns. Do your own due diligence. The more you know about your investments, the better your returns. Bob Carlson, Retirement Watch Investors are expecting a fast change in the Fed's policy, but there could be a long time between the end of tightening and a shift to easy monetary policy. Bear market bottoms in stocks typically don't occur until the Fed switches to an easy policy and begins lowering interest rates. Meanwhile, income investments are looking more attractive than they have in years and will become more attractive in the coming months. I continue to believe we'll have a more serious recession and decline in earnings than is reflected in market prices. That's why we're invested in four flexible funds that can adapt to changing market conditions. Moving mostly in the opposition direction of the major indexes is Hussman Strategic Growth . One prong of the fund's two-pronged strategy is to buy stocks of companies with growth rates that aren't fully reflected in the stock prices. The fund recently owned 273 stocks, none of which is more than 2% of the fund. The second prong is to use futures and options contracts to either leverage the stocks in anticipation of positive returns or hedge the stocks against a market decline. Manager John Hussman uses valuations (a long-term indicator) and a collection of data he calls market internals (a shorter-term indicator) to determine the futures and options positions. For most of the last few years, the fund has been fully hedged against a market decline. That's generated solid returns in 2022, though the fund loses value during bear market rallies. Hussman says bear markets tend to unfold in waves, with market declines interrupted by fast, furious rallies that falter. He'll reduce the hedges when market internals indicate the rallies might persist for a while. But in general, his models indicate the fund will be hedged against a market decline for a while yet. Another flexible fund is Cromwell Marketfield . It can invest in pretty much any publicly traded asset. It also can sell short stocks and use futures and options. The fund develops themes about what it believes is likely to happen in the economy and markets that isn't reflected in market prices. It invests in several themes simultaneously and seeks themes that are uncorrelated with each other. Themes for most of 2022 have been that energy prices are likely to rise, and inflation will be higher than was priced into the markets. The fund also invested with the view that several market sectors were overvalued and sold short stocks in those sectors. Leuthold Core Investment , determines its asset allocation using models and indicators the firm developed and has used for over 40 years. It can invest in most publicly traded securities, increase cash and sell short. It also can overweight or underweight stocks and stock sectors. The firm's models assess both value and momentum in the markets. The fund generally has been bearish on both stocks and bonds in 2022, reducing bonds to their lowest allocation ever. At one point, almost 40% of the fund was in cash. LCORX owned stocks in the sectors with the lowest valuations and sold overvalued sectors short. Recently, the fund continued to have historically low allocations to U.S. bonds. About 13% of the fund was in international bonds. Only 4% is in cash and another 2% is in gold. About 54% of the fund was invested in U.S. stocks, but 19% of the fund was hedging or selling short stocks.

15 Top Funds for Income Investors

Five leading income specialists select their three favorite funds that are well-positioned in a higher rate environment.

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