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BERKO: Portfolio for 4 percent returns with low risk

DEAR MR. BERKO: We just sold our home and have $110,000 to invest for a few years. We want quick access and low risk. Is there any way we can get 4 percent with little risk? What bond funds would you recommend? – SJ, Akron, Ohio

DEAR SJ: Bond investors face two imminent risks: an interest rate hike, which would cause bond prices to decline, and credit risk in which a bond’s issuer may default on its obligation. So consider the following two no-load bond funds: the Fidelity Floating Rate High Income Fund (FFRHX-$9.40), yielding 4.1 percent, and the Vanguard Short-Term Investment-Grade Fund (VFSTX-$10.60).

FFRHX invests some 80 percent of its $11 billion in assets in lower-quality floating-rate loans. A large portion of its portfolio is invested in troubled companies with uncertain financial conditions. FFRHX also invests in derivatives and repurchase agreements, with 10 percent of its portfolio invested in foreign issues. The portfolio of this four-star fund turns over half again as much as others in this category; however, annual expenses of 0.69 percent are much lower than the average of 1.1 percent charged by similar funds. FFRHX owns such names as Albertsons, Altice Financing, Dell, Fortescue Metals Group and Caesars Entertainment Corp. The 0.031-cent monthly dividend has been steadily increasing for the past five years, from 0.023 cent in March 2010, but FFRHX’s share price has declined steadily during the same time frame, from a high of $9.70. FFRHX’s interest rate risk is low, but its credit risk rates from moderate to high. This year, FFRHX is off 0.03 percent after nearly a year’s worth of interest payments. Its worst one-year total return came in 2008, when FFRHX was down 16.47 percent, but its best one-year total return was the following year, when FFRHX was plus 28.85 percent. That was some recovery. Meanwhile, the five-year average return of 3.25 percent is about what you’d get if you owned Pfizer, DuPont, Microsoft or General Electric.

VFSTX has a 1.9 percent yield. Not less than 80 percent of its four-star, $53 billion portfolio is invested in short-term, high-quality issues, and about 20 percent is invested in medium-quality fixed-income securities. VFSTX’s high-quality investments are rated A3 or better, while the medium-quality bonds rate between Baa1 and Baa3. Most of VFSTX’s high-rated bonds are short-term Treasurys, yielding between 0.625 percent and 1.125 percent. However, VFSTX gooses its yield with a few issues – including General Electric, yielding 5.25 percent, and such foreign bonds as the 7.5 percent one issued by the Republic of Turkey. During the past five years, the dividend has been up and down like a Whac-A-Mole. It reached a high of 0.03 cent a month in 2010 and then went down to 0.015 cent last February, finally moving a little higher, to 0.019 cent this month. However, the fund’s market price in the past five years has declined only slightly, from $10.73 in 2010 to today’s $10.60, because this is a Vanguard fund and the management fees are a meager 0.2 basis points.

Here’s what I’d do. Invest $40,000 in FFRHX and $40,000 in VFSTX. Owning $40,000 of each fund will give you a 3 percent short-term return, which is better than a kick in the butt with a pointed-toe boot. In regard to the remaining $30,000, I recommend taking a little bit of risk and buying $15,000 worth of AT&T (T-$33). AT&T has a 5.7 percent dividend that’s been raised modestly in each of the past dozen years. And T’s dividend may be raised more than less modestly in the next dozen years as its acquisition of DirecTV brings in a new source of revenue. Then invest $15,000 in Southern Co. (SO-$44), which has a 4.5 percent yield that has been raised in each of the past several dozen years. And SO recently acquired AGL Resources, a $4.5 billion-revenue natural gas company that should add revenues and profits to SO’s income statement. This acquisition will also make room for much better dividend growth. These four issues combined will give you a safe current return of 4 percent plus modest growth.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.

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