Looking for High Yields

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In the arithmetic of the markets, as prices of stocks and bonds fall, yields rise. And with markets in decline, some funds now offer double-digit yields—remarkable payouts at a time when Treasury bonds and many bank certificates of deposit yield well below 5%.

Make no mistake, the high yields come with risk. Investors are demanding the extra payouts because they fear that defaults will rise. Still, yields on many funds have become so high that they should provide decent returns, even if the economy worsens.

A solid choice is Janus High Yield, which yields 10.9%. The fund invests in corporate bonds, including many issues that are rated below-investment grade by S&P. To hold down risk, Janus sticks with relatively solid issuers, such as Del Monte and Sprint Nextel. So far, the annual default rate of such bonds has remained below 4%, around the historical average.

Another intriguing fund is Eaton Vance Tax-Managed Diversified Equity Income, a stock fund that yields 17%. Eaton Vance achieves the payout by employing a tactic known as dividend capture. Normally, stocks pay dividends every quarter. To increase the income, an investor using dividend capture doesn't hold shares for 12 months. Instead, he buys a stock just before the dividend payment is due. The investor holds the stocks for awhile and then buys another stock that is about to pay a dividend. The aim is to receive more than four checks a year.

Many dividend stocks have been clobbered recently. But Eaton Vance has been able to minimize the damage by sticking with solid stocks, such as Exxon Mobil and AT&T. Those stocks should continue delivering steady dividends, even if the markets remain difficult. 

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