The Iran war delivered a curveball to investors in March. Energy prices surged, pushing inflation expectations and long-term interest rates higher. Forecasts for Federal Reserve interest rate cuts were lowered. Stock prices tumbled around the globe following a promising start to 2026.
There is much riding on the length of the war and the extent and duration of the energy shock stemming from Iran’s near-closing of the Strait of Hormuz. Jeff Sherman, deputy chief investment officer of money management firm DoubleLine, notes that Treasury rates have marched higher even when some signs of a weakening economy at home would suggest a move in the other direction.
“If energy prices are higher for longer, more of household income is consumed by energy,” he says. “If the war is long term, then it has to be funded with more Treasury issues,” which could push rates higher.
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While we await more clarity, there are some attractive yields on offer across many asset classes. “Value has been restored to fixed income over the past 24 months,” says David Albrycht, chief investment officer of Newfleet Asset Management. “You can actually make money in fixed income and pay your bills.” Elevated inflation seems embedded in the economy, but several asset classes, such as stocks and energy infrastructure, offer plump yields and growing dividends that keep pace (or better) with inflation.
This guide will help you identify attractive income-producing investments in 10 different categories that range from low-risk, ordinary securities to more-complex, higher-risk and potentially higher-return investments. We’ve listed investments roughly in ascending order of risk, starting with five fixed-income asset classes.
Before embarking on your search for income, keep a few considerations in mind. You should have a financial plan in place that specifies long-term portfolio allocations. Everyone’s financial situation is different, but generally you should ensure that you have enough cash and equivalents on hand to cover six months of living expenses before investing in high-risk/high-return asset classes. Prices, yields and other data are the latest available as of March 31.
3%–4%: Short-term accounts
Yields on short-term, fixed-income accounts and securities follow movements in the Fed’s short-term interest rates. In 2025, the Fed reduced rates by 75 basis points. In response, yields on short-term accounts have dropped a commensurate amount from a year ago.
THE RISKS: Safe cash equivalents are needed as emergency reserves and to meet short-term liabilities, but excessive cash balances can sap investment returns and purchasing power, especially in this day of elevated inflation.
Andy Kapyrin, a partner at Corient, a wealth management firm, sees a couple of problems with many investors’ short-term accounts: Scarred by the 2022 bear market in bonds, they hold too much cash and often incur risk when they reach for higher yields by taking on considerable credit risk within short-term accounts.
“Cash is cash. You don’t want to get cute with it or reach for an extra basis point,” he says.
HOW TO INVEST: Because this is your safe money and rates are relatively low, it makes sense to minimize credit risk and fund fees. Nathan Sonnenberg, chief investment officer of Pitcairn, a high-net-worth private wealth manager, recommends Vanguard Federal Money Market (VMFXX, yield 3.6%), which holds government securities including Treasury bills and Federal Home Loan Bank paper and has an expense ratio of 0.11%.
Dane Czaplicki, founder and chief executive of Members’ Wealth, prefers using exchange-traded funds to invest in short-term federal debt. He says the expense ratios tend to be lower than for most money market funds (Vanguard’s is exceptionally low), and Treasuries are tax-efficient (particularly in high-tax states) because they are exempt from state and local taxes.
Two funds he uses for clients are iShares 0-3 Month Treasury Bond (SGOV, 3.5%) and State Street SPDR Bloomberg 1-3 Month T-Bill (BIL, 3.5%), with expense ratios of 0.09% and 0.14%, respectively. Both ETFs hold Treasuries maturing in three months or less, which keeps portfolio volatility extremely low, and, like the Vanguard money market fund, both pay monthly dividends.
4%–8%: Municipal bonds
Issued by state and local governments, muni bonds pay interest that is free from federal taxes — and for bonds issued in your state of residence, free from state and local taxes also. Investment-grade munis tend to follow movements in the Treasury market and, like Treasuries, tend to perform well when the economy is in a recession. Because they typically move out of sync with stocks and corporate bonds, they can improve portfolio diversification.
THE RISKS: Due to their relatively low yields, muni bonds have high durations, which means that they’re particularly sensitive to interest rate movements. Tamara Lowin, a senior muni credit analyst for fund manager VanEck, notes a new problem in the industry: Inflation in projects such as building schools and infrastructure due to escalating costs of construction materials and shortages of workers. Partly due to rising costs, a record amount of muni bonds was issued in 2025.
HOW TO INVEST: Perhaps the first task is to determine whether munis make sense in your portfolio compared with taxable bonds on an after-tax basis. For instance, the tax-equivalent yield for a muni yielding 3% is 3.95% for an investor in the 24% tax bracket but over 5% for someone in the 40.8% bracket (37% plus the 3.8% net investment income surtax).
Due to the domination of the muni asset class by U.S. individual investors and their preference for shorter-term bonds, the upward-sloping yield curve — essentially the spread between higher-yielding long-term issues and shorter-term bonds — is generally steeper than for Treasuries, notes Eric Kazatsky, a muni bond manager at investment company MacKay Shields. He adds that the current muni curve is even steeper than normal, which implies relative value compared with Treasuries in intermediate- and long-term munis.
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Kapyrin likes two Vanguard funds for their low fees and solid long-term performance. Vanguard Intermediate-Term Tax-Exempt (VWITX, 3.3%) holds a national basket of 15,800 bonds and has a duration of 5.8 years, implying a loss in value of roughly 5.8% if rates rise one percentage point and an equivalent gain if rates decline by a point. (Bond prices and interest rates move in opposite directions.) The tax-equivalent yield is 4.3% for a taxpayer in the 24% bracket.
Vanguard Long-Term Tax-Exempt (VWLTX, 3.8%), with a duration of 8.3 years, offers a 5% tax-equivalent yield. For ETF investors, VanEck Intermediate Muni (ITM, 3.2%), with a duration of 6.7 years and tax-equivalent yield of 4.2%, is worth a look.
If you’re willing to shoulder more risk to boost tax-free interest income, there is also a high-yield muni market. First Eagle High Yield Municipal (FEHAX, 6.2%), piloted by muni industry veteran John Miller, has a high duration of 12 and a 7.6% tax-equivalent yield for someone in the 24% bracket.
4%–5%: Investment-grade bonds
The core of a typical fixed-income portfolio comprises investment-grade bonds issued by the U.S. Treasury, government agencies (mortgage-backed securities, for example) and corporations. Investment-grade issues are rated BBB or better. These assets typically generate income without dramatic price fluctuations and provide portfolio diversification because they tend to move out of sync with stocks.
THE RISKS: Interest rate spreads between corporate bonds and ostensibly risk-free Treasuries are extremely narrow by historical standards, meaning that corporate bonds don’t command much of a yield premium for their additional risk. Yields on the benchmark 10-year Treasury jumped about 0.40 percentage point in March after the start of the Iran war, producing losses in bonds; investment-grade debt, as measured by the Bloomberg U.S. Aggregate Bond index, was flat in the first quarter.
Moreover, inflation expectations are rising (a negative for traditional bonds), and market expectations for more Fed rate cuts this year have waned since the war started.
HOW TO INVEST: Abhijeet Patwardhan, manager of FPA New Income (FPNIX, 3.5%), is leery of the historically narrow spreads, particularly because he anticipates some deterioration this year in liquidity, or the ease with which bonds can be sold, and in credit quality.
“Spreads aren’t compensating us for credit risk and incrementally worse liquidity,” he says. “Investors should think about whether they’re getting paid for incremental risk, measured in spreads.”
FPA New Income, which has a tremendous long-term record of protecting shareholders’ capital, has a short average duration (currently 3.2 years) and a relatively high cash level in preparation for better times.
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“We’ve put the portfolio in a position so that if bad things happen, we can preserve capital and take advantage of new opportunities,” he says. He prefers securitized products such as asset- and mortgage-backed securities, which have wider spreads, over corporate bonds.
Lew Altfest, chief executive of Altfest Personal Wealth Management, sees good value in non-agency mortgage-backed securities, which, unlike agency-backed securities, don’t come with a government guarantee but offer higher yields. “Most people have profit in and an emotional attachment to their homes, so it’s the last thing they would default on,” he says. Besides, he adds, “default is not so terrible” for bondholders because most houses have large embedded capital gains which could be used to repay loans.
Altfest likes Jeffrey Gundlach’s DoubleLine Total Return Bond (DLTNX, 5.4%). With a duration of 5.5 years, the fund has more than one-third of its holdings in non-agency residential and commercial mortgage securities and most of the remainder in agency paper. For a purely mortgage-backed securities fund, consider DoubleLine Mortgage (DMBS, 4.7%). The ETF has a 6 duration and is also co-managed by Gundlach.
5%–7%: High-yield taxable bonds
High-yield corporate bonds are issued by companies with below-investment-grade ratings (BB or lower). For lending to these riskier businesses, investors are compensated with higher yields than investment-grade bonds offer. High-yield bonds move more in sync with stocks than with Treasuries and, due to higher yields, have lower durations and are less sensitive to interest rate movements than high-quality bonds of the same maturity.
For a variety of reasons, the average quality of high-yield bonds has improved dramatically in recent years, and this asset class may now merit a long-term strategic allocation in a diversified portfolio. Leverage and default levels are low by historical averages, debt was refinanced at low interest rates earlier this decade, and many lower-quality borrowers have tapped the expanding leveraged-loan or private-credit markets instead of issuing high-yield bonds.
The average quality of high-yield bonds has improved dramatically in recent years, and this asset class may now merit a long-term strategic allocation in a diversified portfolio.
Carl Kaufman, co-manager of Osterweis Strategic Income (OSTIX, 5.3%), notes that BB bonds, the highest rung in the asset class, now account for 59% of the high-yield universe; 20 years ago their share was 42%. Bonds rated CCC, the lowest grade, are 9%, compared with 16% 20 years ago.
“The high-yield market has never been as high quality as it is today,” says Kaufman, who observes that the reverse is true of investment-grade bonds, with a record share of IOUs rated BBB, the lowest rung of the investment-grade ladder.
THE RISKS: The risk of default is the main concern. Defaults have been low for six consecutive years — half or less than half of the long-term average of 4%, according to JoAnne Bianco, senior investment strategist at BondBloxx Investment Management. But the default rate would almost certainly tick up if the economy were to tip into recession.
HOW TO INVEST: There are a few methods to mitigate risk in the high-yield universe. One is to focus on BB bonds, the highest-rated debt. VanEck Fallen Angel High Yield Bond (ANGL, 6.7%) is an ETF that does this by investing in an index of bonds originally issued as investment grade that have fallen below a BBB rating. Fran Rodilosso, head of fixed-income ETF portfolio management at VanEck, observes that historically, more than 40% of “fallen angels” have later been upgraded to investment grade. Top holdings include bonds from Nissan, Celanese and Resorts World.
Czaplicki, of Members’ Wealth, says he seeks “low-risk, high-yield funds” for his high-net-worth clients because “I can’t have them losing clients’ money” (investors are typically far more sensitive to losses in fixed income than they are to losses in stocks). Czaplicki achieves this by focusing on short-duration high-yield funds with a track record of protecting investors’ capital.
He’s a longtime holder of David Sherman’s Crossing-Bridge Low Duration High Income (CBLDX, 5.0%), which, with a duration of just 1.0, was up even in disastrous 2022. He also owns Kaufman’s Osterweis Strategic Income, with a duration of 1.4. Kaufman says his fund hasn’t experienced a default in holdings in five years.
For a bit more octane, Czaplicki also holds Intrepid Income (ICMUX, 7.2%), which has a duration of 1.8 and concentrates on debt of smaller companies. Co-manager Hunter Hayes says the fund looks at issue sizes of less than $500 million, compared with an average in the high-yield world of $800 million to $900 million. “We look where others aren’t inclined to look,” he says.
5%–9%: Emerging-markets bonds
Issued by dozens of developing countries, emerging-markets bonds come in many flavors. There are sovereign and corporate bonds, both investment grade and high yield, issued in U.S. dollars or in local currencies.
THE RISKS: Just as with U.S. or developed-country debt, emerging-markets bonds are subject to interest rate risk. Local-currency bonds also carry currency risk because currencies such as the Mexican peso and Brazilian real fluctuate daily in value against the U.S. dollar.
HOW TO INVEST: Emerging-markets bonds, denominated in both U.S. dollars and local currencies, have performed splendidly in recent years, and the asset class has become mainstream. BondBloxx’s Bianco points to several fundamental reasons behind the bonds’ newfound popularity: Higher yields than in the U.S., generally sound fiscal and monetary policies, falling inflation and interest rates, and a diversification benefit for a U.S.-only bond portfolio.
Marcelo Assalin, head of William Blair’s emerging-markets debt team, notes that average debt levels are only 60% to 65% of gross domestic product, compared with 100% or higher in many advanced countries, including the U.S. and Japan.
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Eric Fine, who is the manager of the ETF VanEck Emerging Markets Bond (EMBX, 5.5%) and has managed emerging-markets bond funds for 35 years, reports that they’ve outperformed developed-country debt for more than 20 years but that only in the past two years have investors awakened to this fact. He notes that emerging countries’ central banks tend to maintain relatively high real interest rates (nominal rates adjusted for inflation), which tamps down inflation in the economy and supports local-currency strength.
Investment decisions include whether to invest in local-currency or U.S. dollar–denominated bonds (or both); in investment-grade or sub-investment-grade bonds (the universe is split roughly 50-50); and in passive indexes or actively managed funds.
BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond (XEMD, 5.0%) was launched in 2022. Bianco says the ETF is a modified version of the JP Morgan index, with sovereign bond exposures limited to 10 years or less, which reduces duration by about two years from the broad benchmark, to 4.1. The top three countries in the portfolio are Saudi Arabia, Turkey and Mexico.
Fine’s VanEck fund, by contrast, is actively managed with both hard-currency and local-currency bonds. For example, in Brazil he finds the local-currency bonds, which yield 14.8% in a country with just 3.8% inflation, to be more attractive than U.S. dollar bonds. In Argentina he likes both local and U.S. dollar bonds.
American Beacon Developing World Income (AGEPX, 9.2%), managed by three subadvisers, focuses on smaller developing countries but has compiled an outstanding long-term record on both an absolute and a risk-adjusted basis.
3%–5%: Real estate investment trusts (REITs)
Since REITs are required to distribute at least 90% of their taxable income each year, they offer relatively high yields. REITs can raise rents through contractual rent escalators or when leases expire, which provides strong protection against inflation.
THE RISKS: REITs are vulnerable to rising interest rates because they tend to carry high debt loads, and they face increasing competition in the eyes of investors because of the rising yields becoming available on fixed-income investments.
HOW TO INVEST: After spending years in the wilderness, REITs seem to be returning to favor. Jeff Kolitch, manager of Baron Real Estate Income, ticks off several reasons for this. Years of underperformance and falling interest rates have led to attractive valuations relative to REITs’ historical valuations and private-market real estate valuations today.
As hard assets, REITs are considered a haven from investments linked to artificial intelligence. Since the COVID-19 pandemic, the construction and supply of new buildings has lagged demand in apartments, hotels, industrial warehouses, senior housing and other real estate sectors. “It’s a very attractive setup, and we’re just in the early days of it,” says Kolitch.
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Shopping-mall REITs fell prey to COVID and fears that e-commerce would empty out stores. “The fear that nobody would go back to the mall was much worse than the reality,” he says. Nobody has built malls for years, notes Kolitch, who is drawn to “best-in-class malls” with high occupancies and little competition in demographically attractive geographies.
That attracts him to Simon Property Group (SPG, 4.6%), the nation’s largest operator of shopping malls, and Macerich (MAC, 3.6%), which owns malls principally in California, Arizona and New York and is a REIT that Kolitch considers extremely undervalued.
The supply of multifamily rental housing has also lagged demand in many cities, particularly for young workers unable to purchase a home. Adrian Helfert, chief investment officer of Westwood Holdings Group, likes Essex Property Trust (ESS, 4.3%), which owns apartment communities on the West Coast. Kolitch is partial to Equity Residential (EQR, 4.7%), which owns 85,000 apartments in what he considers “best-in-class real estate in the best markets” on the two coasts.
The travel industry is booming, and here also supply lags. “Replacement costs have gone through the roof; it’s not economical to build, but people want to travel,” Kolitch says. He holds Host Hotels & Resorts (HST, 4.2%), the largest hotel REIT, which owns luxury city-center and resort properties operated by Marriott, Ritz-Carlton and other hotel chains.
If you prefer to hold a diversified, passively run REIT index fund, consider Vanguard Real Estate Index (VNQ, 3.4%), an ETF that holds a basket of 146 securities.
3%–7%: Dividend stocks
Dividend-paying stocks play an important income role in a diversified portfolio. Unlike fixed-income investments such as Treasuries and corporate bonds, healthy companies can boost dividend distributions each year, which is a potent way to maintain the purchasing power of a long-term portfolio. That’s particularly valuable in an inflationary environment such as prevails today.
THE RISKS: Stocks tend to be much more volatile than high-quality bonds and suffer more in a recession. Some investors make the mistake of reaching for the highest yield, which can be an indication of a company in distress.
HOW TO INVEST: Dividend-payers are back in vogue. “Last year, tech stocks took the oxygen out of the room; now there’s a rotation out of tech stocks,” says Jay Hatfield, chief executive of Infrastructure Capital Advisors, who foresees equity-income stocks outperforming the S&P 500 this year. Monem Salam, portfolio manager of Amana Income, notes that dividend payers tend to be less volatile during rocky market periods because “the dividend part is much more stable than the capital-gains part.”
Ben Lofthouse, head of global equity income at Janus Henderson Investors, notes that foreign stocks often provide more-attractive yield opportunities for a variety of reasons, including stock valuations, tax preferences, market composition and the penchant of many U.S. companies to buy back shares rather than distribute dividends. One stock he likes for the yield is Amcor PLC (AMCR, 6.5%), a global producer of plastic packaging for consumer sectors such as food, pets and health care.
In fact, basic consumer stocks with solid and rising dividends and stable product demand are a sensible way to keep your seat during a period with a volatile market and a murky economic outlook. Tobacco, an addictive product, meets those requirements. Julien Albertini, deputy head of global value at First Eagle Investments, holds both Philip Morris International (PM, 3.6%) and British American Tobacco (BTI, 5.8%), the largest and second-largest tobacco companies in the world, respectively. Both firms are rapidly diversifying from cigarette production to products such as vaping pods, nicotine pouches and other smokeless tobacco products.
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Another consumer stock that attracts Albertini is Mexico’s Fomento Economico Mexicano SAB (FMX, 6.0%), known as Femsa, which owns Oxxo, the biggest convenience-store chain in Mexico. Femsa also owns nearly half of Coca-Cola Femsa, one of the world’s largest Coke bottlers.
For healthier fare, consider some medical stocks. Salam seeks big-pharma companies with robust drug franchises and pipelines, strong balance sheets, and cash flows enabling annual dividend increases. He thinks that Switzerland’s Novartis (NVS, 3.1%) fits the bill.
For diversified baskets of dividend stocks, consider domestic or international portfolios. Alex Seleznev, president of Capital Squared Financial, recommends Schwab U.S. Dividend Equity (SCHD, 3.3%) and another ETF, iShares International Select Dividend (IDV, 4.4%).
3%–7%: Midstream energy infrastructure
Midstream companies process, store and transport oil and natural gas via pipelines. They sit between upstream companies (energy producers) and downstream firms, which make finished products such as liquefied natural gas (LNG).
The industry boomed during 2021– 24, when it easily outperformed the S&P 500 index. Energy took a breather in 2025, but it is off to the races again this year. During the first quarter of 2026, index-tracking ETF VanEck Energy Income (EINC, 3.3%) surged 23%, compared with a 4% decline in the S&P 500.
Driven more by volume than commodity prices, midstream is like a toll-way, collecting rent (with annual inflation adjustments) from the liquids passing through its pipelines. Natural gas is now the hot ticket. Domestically, demand is surging for electricity for AI data centers. Abroad, there is burgeoning demand for U.S. exports of LNG (even before the shutdown of production in Qatar, the world’s third-largest exporter), and export capacity is projected to double within five years.
THE RISKS: The main risk is a recession, which would reduce energy consumption and the volumes of oil and gas transported through energy infrastructure.
HOW TO INVEST: Both corporations and master limited partnerships operate in the sector. Yields tend to be higher for MLPs, which distribute most of their income each year, but partnerships issue K-1 forms, which can be pesky at tax time if you don’t use an accountant or a version of tax software that can handle them.
Parag Sanghani, who comanages several energy funds for Westwood Salient, likes Energy Transfer LP (ET, 6.9%) for its chunky dividend and its strategy of expanding its large network of natural gas pipelines. He also holds Enterprise Products Partners LP (EPD, 5.8%), which, with an unusually strong balance sheet for the industry, has boosted dividend distributions for 27 consecutive years. (Enterprise is a member of the Kiplinger Dividend 15, the list of our favorite dividend stocks.)
Driven more by volume than by commodity prices, midstream energy companies are like tollways, collecting rent from the liquids passing through their pipelines.
Among corporations, First Eagle’s Albertini favors ONEOK (OKE, 4.6%) for its focus on natural gas and gas liquids and for its reliable annual dividend growth of 3% to 4%. Sanghani recommends two industry giants, Williams Companies (WMB, 2.9%), which moves one-third of domestic natural gas, and Canada’s Enbridge (ENB, $54, 5.3%), the biggest company in the sector by stock market value.
For a diversified basket of industry holdings, consider Pacer American Energy Infrastructure (USAI, 4.2%), a passive index ETF with a tilt toward natural gas, or the actively managed fund Catalyst Energy Infrastructure (MLXIX, 4.6%); both make monthly dividend distributions. As with VanEck Energy Income, these funds hold Canadian companies along with U.S. MLPs and corporations but obviate the need to issue K-1s by keeping exposure to MLPs at less than 25% of assets.
5%–11%: Closed-end funds
Closed-end funds raise capital through an initial public offering, then invest the money in stocks, bonds, MLPs and other financial assets. Shares of closed-end funds fluctuate in price according to investor demand, and shares routinely trade at a discount or premium to net asset value (or per-share value) of the fund’s underlying assets. The funds typically pay monthly dividends and have relatively high yields, which makes them popular with income-seeking investors.
THE RISKS: Most closed-end funds use borrowed money to purchase portfolio assets. Leverage can cut both ways, augmenting price returns in up markets but amplifying losses in NAV when markets decline.
HOW TO INVEST: About one-third of closed-end funds invest in portfolios of municipal bonds. Steve O’Neill, a portfolio manager at RiverNorth Capital Management, says the popularity of munis in the closed-end wrapper is explained by the fact that the muni yield curve is nearly always upward sloping, which means that fund managers often employ leverage by borrowing at short-term, typically floating rates and investing in longer-term muni bonds, seeking to capture the spread between borrowing costs and portfolio yields. The income earned through leverage also generally qualifies as tax-free income for fund holders.
O’Neill recommends NYLI MacKay DefinedTerm Muni Opportunities (MMD, 5.3%), which trades at an 8% discount to NAV and has a 35% leverage ratio — about average, according to CEF Data, the source for closed-end fund information in this article. John Cole Scott, president of CEF Advisors, recommends AllianceBernstein National Municipal Income (AFB, 5.6%), which trades at a 9% discount and has higher leverage, at 40%.
“At a 9% discount, the market’s offering rare value for high-quality muni exposure in a conservative asset class,” he says. Assuming a 24% federal tax bracket, the tax-equivalent yields for the funds are 7% and 7.5%, respectively; for a taxpayer in the 40.8% bracket, the tax-equivalent yields would be 9% and 9.5%.
For taxable bonds, Scott is keen on Ares Dynamic Credit Allocation (ARDC, 11.1%) for its low duration of 1.3, its 9% discount to NAV and its portfolio balance of one-third corporate bonds, one-third senior loans and one-third collateralized loan obligations. Ares has 40% leverage.
Most closed-end funds use borrowed money to buy portfolio assets. That can cut both ways, augmenting returns in up markets but amplifying losses when markets decline.
FPA and Thornburg are two venerable fund families with closed-end funds that closely resemble open-end funds offered by the firms with phenomenal long-term risk-adjusted returns. Both are trading at discounts and have higher distributions than their open-end cousins; neither uses leverage.
FPA’s Source Capital (SOR, 5.4%), trading at a 3% discount, is co-managed by Steve Romick, who has managed the acclaimed FPA Crescent fund for 30 years. These are opportunistic, multi-asset funds with a value tilt and a focus on preservation of capital. In addition to investing in stocks and bonds, Source takes advantage of the permanent capital structure of a closed-end fund (once capital is raised in an initial public offering, shares trade on an exchange, eliminating the need to be able to redeem shares daily, as open-end funds must) to invest in some higher-yielding, less-liquid assets, such as investments in limited partnerships that make private asset-based loans.
Thornburg Income Builder Opportunities Trust (TBLD, $21, 5.9%), at a 7% discount, is very similar to Thornburg Investment Income Builder, a global balanced fund with outstanding risk-adjusted returns across more than two decades. Opportunities Trust boosts its yield by selling options contracts on a small portion of its stock portfolio, which adds income from option premiums to the income from stock dividends and bond interest.
10%–13%: Business development companies (BDCs)
BDCs lend to small and midsize private businesses that are typically not large enough to access bank lending. Like closed-end funds, BDCs can borrow money to leverage portfolios, and they can trade at premiums or discounts to net asset values (which are marked to market quarterly) of portfolio holdings. Like REITs, they are required to distribute at least 90% of taxable income each year.
THE RISKS: As listed securities, BDCs are subject to stock market volatility. Most of their loans are floating rate, which means that their interest income declines if rates fall — as has occurred over the past year. The bad press surrounding “private credit” has weighed on BDC market prices.
HOW TO INVEST: Although perhaps not for the faint of heart, veteran BDC investors such as Mike Petro, manager of the ETF Putnam BDC Income (PBDC, 12.1%), see compelling values emerging in the sector. The average discount to NAV is 22% — 20 points wider than the average over the past five years, according to Scott — and most public BDCs, deservedly or not, are being tarred with the same brush.
For example, software is in the crosshairs in private debt portfolios due to a perception (exaggerated in the view of many analysts) that it will be decimated by AI disintermediation. Petro feels comfortable with Kayne Anderson BDC (KBDC, 11.7%), which he says has just a 2% exposure to the software industry, boasts a strong credit record and is repurchasing shares, yet trades at a 16% discount to NAV. He also likes Hercules Capital (HTGC, 12.7%) for its conservative lending practices, low credit loss history and towering long-term return on equity (a measure of profitability) of 13.5%.
Mitchel Penn, a BDC analyst at Oppenheimer & Co., says that BDCs are being priced as if there’s a recession. His favorite metric for analyzing companies is their return on equity since going public, which is evidence of their skill at underwriting credits and minimizing loan losses. For instance, Ares Capital (ARCC, 10.7%), by far the largest public BDC, has achieved an 11.2% average return on equity (higher than 10% is impressive) since its IPO in 2004. Ares typically trades at a premium to NAV but now sells at a 10% discount. Sixth Street Special Lending (TSLX, 10%), with a 12.5% return on equity since its 2014 IPO, traditionally trades at a huge 25% premium to NAV but is now at just 8% above.
For many investors, spreading bets in an actively managed portfolio like the Putnam BDC fund will make sense. The fund’s largest holdings include Ares, Blue Owl Technology and Main Street Capital.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.