Saturday, December 24, 2011

Best bond ideas for big income with less risk in 2012

Best bond ideas for big income with less risk in 2012 ; Over the past year, consumer prices rose 3.9 percent. But as of early November, the benchmark 10-year Treasury yielded only about 2.0 percent. So even if inflation fell by one-third, you'd still come out behind with a Treasury bond. The good news is that you have alternatives to T-bonds that deliver more income with less risk.

Kiplinger's doesn't expect a recession in 2012, so you can invest in bonds that aren't government-guaranteed without worrying about a slew of defaults and rating downgrades. At the same time, we don't envision the kind of brisk economic growth that would stoke inflation and cause massive selling of bonds. Below are my best income ideas for the year ahead.

Mortgages: Ginnie Maes, which pass along interest from federally backed home loans, are sensible for your short-term savings. With Ginnies, you get a current yield of 3 percent or a tad more from bonds that are fully backed by Uncle Sam.

The best way for most people to invest is through low-cost funds, such as Vanguard GNMA (symbol VFIIX) and Fidelity GNMA (FGMNX). Both yield 3.2 percent and have three-fourths of their assets in securities issued at interest rates of 4 percent or higher.

If rates rise, Ginnie Mae funds will hold up better than Treasury funds.

Corporates: Most financial companies are on the mend, which is good news because they're the biggest issuers of investment-grade corporate bonds. The phone companies, as well as utilities and some blue-chip firms, are definitely sound credit risks.

Yields on high-grade corporate bonds have fallen to about 4 percent, but that's acceptable.

Among funds, good choices are T. Rowe Price Corporate Income (PRPIX), which yields 4.3 percent, and iShares iBoxx $ Investment-Grade Corporate Bond (LQD), an exchange-traded fund that pays 3.9 percent.

Municipals: The relationship between what state and local bonds yield and what the Treasury pays is out of whack, with munis often yielding more.

To cite one example, Georgia general-obligation (GO) bonds maturing in 2023 and rated AAA by Standard & Poor's recently yielded 2.7 percent. That's equivalent to a taxable yield of 4.2 percent for an investor in the 35 percent federal tax bracket. The yield of similar-maturity Treasuries was 2.0 percent.

But here's a caveat: Although municipal finances are improving, local GO bonds and speculative, construction-related bonds (such as airport expansions) could suffer if Congress cuts aid to states. So it's OK to own state GOs but otherwise buy revenue bonds backed by essential services, such as water bills and road tolls. Fidelity Intermediate Municipal Income (FLTMX), a member of the Kiplinger 25, yields 2.4 percent. ( Source ) For the latest updates on the stock market, visit Stock Market Today
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