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No one can time the Fed's decision, but one move you might make in preparation is to shift part of your bond portfolio into dividend-paying stocks. While stocks are inherently riskier than bonds, these shares are generally less volatile than other types of stocks and in many cases offer income-hungry investors attractive yields relative to bonds. They tend to do well in a rising rate environment, which is usually a sign that the economy is picking up. When the economic picture improves, companies generally raise their dividend payouts slowly over time, says Howard Silverblatt, senior index analyst at
Two funds with a strict dividend mandate and good performance records are
Vanguard Dividend Growth (symbol VGIDX) and
Meanwhile, back in your bond portfolio, it's best not to reach for higher yield by buying treasuries with longer maturities. Those securities may look most appealing now, but they'll be hit harder when rates move upward. It's important to be diversified among a range of fixed-income assets and maturities, says John Diehl, senior vice president in the retirement division of The Hartford. Two bond fund favorites of Alice Lowenstein, director of managed portfolios at investment research firm Litman/Gregory, are PIMCO Total Return (PTTAX) as a core holding and Loomis Sayles Bond (LSBDX) as a supporting player.
PIMCO's manager Bill Gross generally sticks to offerings in the Barclays Capital U.S. Aggregate Bond Index (the most commonly cited bond index), though he will occasionally invest in other sectors like high-yield bonds or emerging-markets debt. Loomis Sayles Bond is a multisector bond fund that, at the end of September, had no exposure to U.S. government debt. The funds are up an average annual 7 percent and 10 percent, respectively, over the last 10 years. Tom Lydon, editor of ETFTrends.com, suggests the iShares iBoxx $ Investment Grade Corporate Bond ETF (HYG), which covers the medium-term investment-grade corporate bond universe. It has returned 10 percent so far this year.
High-yield bond funds may merit a look, too.
Available at Amazon.com:
Investing - Why You Should Buy Stocks That Pay Dividends