Rising Yields Are Good News for Income Investors: 8 Favorite Ideas

Higher interest rates are a strong headwind for corporate growth a primary worry for stock-oriented investors. If there is a "silver lining" in this scenario, however, it is the higher yields now available to investors seeking income rather than growth.

Several contributors to MoneyShow.com review their favorite fund ideas -- including munis, preferreds, convertibles, and corporates.

Todd Shaver, Bull Market Report

Invesco Municipal Trust (VKQ) has witnessed a year-to-date pullback of over 31%, reaching its lowest point since the Great Recession in 2008. As a result, the fund is now very much underpriced. For investors in pursuit of tax-free current income, with minimal downside, the current state of the muni bond business offers a great opportunity, especially for investors with a longer time horizon.

Muni bonds stand to add substantial value to portfolios in the mid- to long-term, especially as the underlying assets are an embodiment of safety and reliability. The default rate of muni bonds between 1970 and 2021 remains at 0.08%, which is astonishingly low.

The Invesco Municipal Trust currently trades at an 11% discount to book value and offers yields of nearly 6% at current levels. This is undeniably attractive for a tax-free bond, especially with tax-equivalent yields, or taxable bonds now have to offer yields in excess of 8% to compare favorably with tax-exempt munis.

A leading player in the global multi-market and multi-sector fixed-income securities space, the Pimco Dynamic Income Fund (PDI) has also been through a rough couple of months, with a YTD pullback of over 24%.

As a result of the recent selloff, and the worst bond market in decades, the fund currently provides a mouthwatering yield of 13.4%, all the while trading at just a 5% premium to net asset value (NAV). This is a rarity for a fund that has long traded at an average of at least 10% to 15% premium to NAV, making this the perfect value-creation opportunity for investors looking to average down.

Unlike Treasury securities or muni bonds, this fund is more suited to investors who are willing to take risks in pursuit of higher yields and capital appreciation. Credit market cycles, during 2009, 2011, 2016, and 2020 have provided investors with tremendous value creation opportunities. The recent selloff has created another such opportune point of entry.

Tim Plaehn, The Dividend Hunter

I am more convinced than ever that preferred stock investments should be a significant portion of your income-focused portfolio. We invest in individual preferreds for stable, high-yield income. Once you buy shares, expect to hold them for the long term.

Typically, most preferred stocks will trade around the par value (typically $25) with yields close to the coupon rates. Prices will fluctuate to reflect changes in market interest rates for similar securities. With interest rates rising this year, preferred shares have gone from trading at a premium to par prices to many issues trading at a discount.

Individual preferred stocks offer a safe, high-yield income stream. If you have a smaller portfolio and building for the long haul, you can get preferred stock exposure with the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) , which was added to our recommendations list soon after the fund launched in 2018.

In contrast index tracking funds, the PFFA managers use an active management approach to look for the best opportunities in the preferred stock universe. In addition to being actively managed, the PFFA portfolio uses moderate leverage and sells options to boost returns.

PFFA pays stable monthly dividends. The current monthly rate is $0.1625 per share, which gives a current yield of about 8.7%. The dividend was increased by 1.5% in January this year. The fixed stable and monthly dividends make this fund an excellent choice for automatic dividend reinvestment. You can watch your investment income grow month by month. (For disclosure, Tim Plaehn holds a personal long position in PFFA.)

Marty Fridson, Forbes/Fridson Income Securities Investor

Calamos Dynamic Convertible & Income Fund (CCD) is a term fund, expected to liquidate on March 26, 2030, and rated five stars by Morningstar. CCD invests in convertible and high-yield fixed-income securities, with the objective of generating total return through a combination of high current income and capital appreciation.

The fund aims to provide consistent income through its monthly managed distribution policy, which may include net investment income, net realized short and long-term gains, and return of capital. Typically, at least 50% of assets are invested in convertible securities.

Active asset allocation among convertible issues, fixed-income, and equity securities is used to enhance risk-managed returns. As of 08/31/22, convertible securities accounted for 81.4% of the portfolio. Total return performance has been solid historically. However, in 2022 returns have been negatively affected by increased recessionary risks and higher interest rates, leading to a steep decline in portfolio holdings.

As a result, market price total return for the year-to-date period ended 06/30/22 was -29.09%. This investment is suitable for high-risk portfolios. Buy at $24.00 or lower for a 9.75% annualized yield.

Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (GBAB) seeks to provide current income and long-term capital appreciation. The fund's strategy is to invest largely in a diversified portfolio of taxable municipal securities, referred to as Build America Bonds (BABs).

Under normal market conditions, at least 80% of managed assets are invested in high grade securities. As of 06/30/22, the portfolio was dominated by BABs, Qualified School Construction Bonds (QSCBs), and Taxable Municipal Securities (58.25%). The top five sectors in the portfolio were Schools (13.59%), Other (11.14%), Bank Loans (8.73%), Universities (8.53%), and Hospitals (8.43%).

Market price performance during 2021 and 2022 was challenged by increased market volatility, higher interest rates, and the threat of a recession. The YTD market price total return for the period ended 06/30/22 was -22.08%.

However, we believe performance in 2023 stands to improve sharply with increased market stability as the Fed remains intent on avoiding a full-fledged recession. GBAB is suitable for medium-risk portfolios. Distributions are largely taxed as ordinary income. Buy at $22.00 or lower for a 6.86% annualized yield.

Michael Foster, Contrarian Outlook

Municipal bonds are too often ignored by investors. This is a huge missed dividend opportunity. If you're in a high tax bracket, I probably don't have to tell you how valuable a tax-free yield is, but the numbers here are very compelling.

Take the 5.4% yield on the Nuveen AMT-Free Municipal Credit Income Fund (NVG) , a closed-end fund (CEF) that's one of the best ways for you to crack the muni market. Thanks to its tax-free nature, that already-healthy 5.4% yield could be worth 9% or more to you if you're in the highest tax bracket. That's the kind of yield you'd normally have to look to a high-risk investment, like junk bonds, to get.

But munis are the opposite of that -- they are renowned for their stability and primed to hold up well no matter what happens with the economy from here. If recession predictions are accurate, municipalities are well-equipped to handle it, thanks to the reliable revenue they get from local taxpayers. Plus, many cities and states are still holding substantial pandemic-aid funds from the federal government.

NVG is actively managed, and with munis, having an experienced manager at the helm is critical. That's because the muni market is much smaller than the stock market, so a muni-bond manager is better able to evaluate each bond's quality. Personal connections help here, too, as the manager can be tipped off when attractive new bonds are issued.

This nationwide muni bond fund holds assets across the country, making it geographically diversified, while its portfolio of over a thousand bonds protects it from one bond failing to pay out thanks to its massive diversification. What's more, about three-quarters of the portfolio is in investment-grade credit, meaning we're getting the best quality and safest bonds out there.

Rida Morwa, High Dividend Opportunities

With over 50 years of actively managing fixed income instruments, PIMCO is one of the best-rated firms for sustainable income production and delivering value to their investors. Two of PIMCO's newest closed-end funds, are, in fact, star performers when it comes to income production. Both these closed-end funds (CEFs) have recently raised their distributions and maintain substantial undistributed net investment income, which are strongly indicative of special distributions at the end of the year.

PIMCO Dynamic Income Opportunities Fund (PDO) was born in a yield-less market in January 2021. This CEF comprises securities from multiple fixed income sectors with a total leverage-adjusted effective duration of 2.88 years. Short-term fixed income instruments are valuable in a rising rate environment due to the ability to quickly rotate capital into higher yielding securities upon maturity, and ~33% of PDO's portfolio matures within the next 12 months.

PDO distributes $0.1279/share every month, a substantial 11.1% annual yield. It is noteworthy that PDO made an 8% distribution increase effective from August. This reveals the fund managers' confidence in the CEF's ability to sustainably support the payout. And PDO investors can expect another handsome special distribution in December, similar to last year.

Despite PDO executing well in all aspects, the fund has sold off this year amidst bear market fears. The CEF is now available at an attractive 6.1% discount to NAV. With solid distribution coverage, excellent prospects of a special payment, and a portfolio composition designed for rate increases, PDO is a great buy to navigate this market uncertainty.

PDO's younger sibling is another quality pea from the PIMCO pod. PIMCO Access Income Fund (PAXS) was born in February 2022, before the Fed began its quantitative tightening spree. PAXS maintains a portfolio of fixed-income securities with a total leverage-adjusted effective duration of 3.86 years, which is slightly more middle-term compared to PDO, yet attractive during rate hikes.

Right off the bat, PAXS has had the opportunity to expand the use of its leverage to buy higher-yielding short-to-mid-term bonds and support its distribution. PAXS has demonstrated fantastic distribution coverage in its infancy and recently announced a whopping 28% increase in monthly distributions to shareholders.

The current $0.1494/share monthly payment calculates to an attractive 11.3% yield. The CEF maintains $0.48 in undistributed NII, which is roughly equal to the distributions for three months. Like PDO, we expect PAXS to continue out-earning its payout and reward shareholders with a special dividend at the end of the year.