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Opportunities Abound in High-Yield Funds

With bond yields skimpy, plenty of investors are starved for income. To find rich opportunities, consider a small group of funds with double-digit yields. That's a tempting payout, especially at a time when 10-year Treasuries yield 3.84%, and stocks have been gushing red ink.

This is an ideal time to go for a high yield opportunity, since this yield also dwarfs what's being offered by local and national banks.

High yields can be a sign of risk, but these high-yielding funds are relatively stable. After being pounded in the market downturn, the funds sell at bargain levels.

A solid choice is Kensington Select Income (KIFAX), which yields 10.2%. The fund focuses on preferred shares of real estate investment trusts (REITs), an obscure corner of the investment world. Many preferred securities -- which resemble bonds -- are issued by financial companies.

When the credit markets started going haywire last summer, investors dumped bank preferred shares. Then the selling spread to preferred shares of all kinds, including REIT securities.

In the arithmetic of the markets, as prices drop, yields rise. Average yields on REIT preferreds climbed from 7.55% in June 2007 to 9.90% a year later. Investors may be demanding the high yields as compensation for the risk of default. But so far, default rates have been small among REITs, which own portfolios of properties, such as malls and office buildings.

Even if the economy slows, default rates should remain low, says Joel Beam, portfolio manager of Kensington Select. "Most plain-vanilla REITs have plenty of cash flow to cover the interest payments on their preferred shares," he says.

Kensington favors preferreds from reliable REITs, such as Kimco Realty (KIM - Get Report), which owns neighborhood shopping centers. These shopping centers are often anchored by supermarkets and drugstores, businesses that tend to produce steady results during recessions.
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