Forget the Fed: These 5 Funds LOVE Rising Rates (and Pay 7%)

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By Michael Foster

A lot more investors have been emailing me lately, fearful of a market downturn. This tells me one thing: todayaEURtms market is a scared market.

But you donaEURtmt need to be scared. In fact, thanks to overhyped investor fears, you can easily lock in 7% dividends and prepare yourself for a downturn with less risk than youaEURtmd get buying stocks directly.

The key? The 5 unloved (for now) funds IaEURtmll show you in a moment. First, though, you might be wondering why I say these funds are less risky than individual stocks.

For one, each of these 5 hold hundreds of assets, spreading your cash out in a way that a basket of a few stocks canaEURtmt. Second, and more important, these funds invest in more than just US stocks, exposing you to different asset classes, as well.

Why is this important? Because not all asset classes behave the same way in a crash.

Take a look at what happened during the Great Recession and market collapse of 2008aEUR"09, when the S&P 500 plummeted by over half at its worst and was still down by a third over a year and a half:

2008aEUR"09: The Ultimate Proving Ground

Note that high-yield bonds (here in red) also suffered during the period, but not as badly; in fact, high-yield bonds (which are the most closely correlated with the stock market) never dipped as low as stocks and recovered more quickly. Meanwhile, municipal bonds (orange) hardly fell at all, even in the worst part of the downturn, and US Treasuries (green) actually went up.

If this doesnaEURtmt convince you that you need to diversify beyond stocks, nothing will.

On that note, here are my 5 fund picks to get you a well-rounded portfolio and those 7% dividends I mentioned earlier.

aEURoeScared MarketaEUR Pick No. 1: A 6.6% Cash Dividend From AmericaaEURtms Top Stocks

The Dividend and Income Fund ( DNI ) is a closed end fund ( CEF ) holding a collection of US stocks with a singular focus: handing you a high dividend. And with a 6.6% yield, DNI delivers.

The way this fund gets that income is solid, as well. With 92 stocks in the portfolio, DNI gives you tremendous diversification while focusing on well-known large cap names like Apple ( AAPL ) and the Walt Disney Company ( DIS ).

But the best part is the discount.

This fund trades at a massive 23.2% markdown to net asset value (NAV, or what its underlying portfolio is worth). ThataEURtms far bigger than its 12.7% average discount over the last decade. And that markdown has widened in 2018, setting us up for even bigger gains as it aEURoesnaps backaEUR to normal:

Wider Discount Set to Slingshot DNI Higher

This is especially noteworthy because at the same time, DNIaEURtms total return on its portfolio has been solid over the same period:

An Ignored Gain

When the market realizes this mistake, expect DNI to rise significantly. Until then, enjoy those fat dividend checks.

aEURoeScared MarketaEUR Pick No. 2: Around the World in (Over) 80 Bonds

To say the PGIM Global Short Duration High Yield Fund ( GHY )aEUR" with over 370 bonds in its portfolioaEUR"is diversified is an understatement! And with its 7.2% yield, GHY is an overachiever on the income and diversification fronts.

The fundaEURtms mandate is simple: buy the highest quality bonds from around the world, focusing on corporate bonds issued by the most financially sound companies. Hence the fund has bonds from NCR Corporation, Beazer Homes, Bombardier and Nielsen plc.

To make this portfolio even safer, GHY focuses on short-duration bonds, or those that will expire within the next couple years, lowering your exposure to rising rates (which cause bond prices to go down) and the possibility of any default from the companies issuing these bonds.

That has been a winning combination, which is why the fundaEURtms portfolio is up a nice 3.6% so far in 2018:

A Steady Rise

But that doesnaEURtmt mean the market loves this fund! In fact, while its portfolio has gone up in value, its price has gone down:

First-Level Investors Miss the Mark aEUR

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options
Referenced Symbols: DNI , CEF , AAPL , DIS , GHY

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