"We think that junk bonds -- bonds rated BB+ or lower by S&P or Ba1 or below by Moody's -- are worth considering as part of a diversified income portfolio." says Carla Pasternak.
In her High Yield Investing, she asks, "If you agree with us that one's person's junk may turn out to be your treasure, how do you invest?" She answers by offers a pair of junk bond fund ideas.
"SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK) has a $2.2 billion portfolio of 140 junk bonds. Its holds junk bonds in only three sectors: industrials (75.8%), utilities (12.16%) and financials (8.72%).
"It pays a monthly distribution comprised entirely of earnings. JNK is best held in a tax-advantaged account as distributions are taxed at your marginal income tax rate.
"Over the past 12 months, JNK has distributed $4.66 per share. On a trailing 12 month basis, the yield is approximately 12.8%.
"In other words, fund investors are still getting a substantial premium to the average 8.9% coupon rate of the fund's holdings. A slight expense ratio of 0.40% trims total returns.
"Investors have thus far shrugged off rising default rates and an iffy economic recovery as JNK's rally from its March bottom shows no sign of ending. The fund has continued to dole out rich earnings-driven distributions through the worst of the credit crisis.
"For more risk-tolerant investors who can stomach potential volatility, JNK is a strong performer with a steady, monthly payouts and a double-digit yield.
"Unlike many junk bond funds, Pimco High Yield D (PHYDX) devotes 25% of its $7 billion portfolio to investment grade bonds rated BBB or higher. Another 40% of its 552 bonds are in the upper rungs of junk.
"This conservative approach means during bullish periods for junk bonds such as the current one, PHYDX is likely to underperform its peers. On the other hand, when junk bonds head south, it should be somewhat less affected.
"Monthly distributions remained stable during the worst of the junk bond crisis in the fall of 2008. So far this year, distributions are comprised solely of investment income, which is taxable as ordinary income. PHYDX's expense ratio is a very reasonable 0.91%.
"As of May 15, when the previous manager resigned, PHYDX has been headed by legendary bond investor Bill Gross who founded PIMCO in 1971. The New York Times has called Gross the 'nation's most prominent bond investor.'
"PHYDX represents a sensible choice for income investors who wish to participate in the junk bond market in a conservative way. With Gross at the helm, it is run by one of the most knowledgeable bond investors in the country. However, investors may wish to wait until it corrects closer to net asset value before buying the fund."
Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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