The Touchstone fund recently bought preferreds from JPMorgan Chase (JPM) that yield 5.8%. In contrast, short-term bonds from the bank yield 1.8%. Portfolio manager Mitchell Stapley says that preferreds issued by banks tend to pay particularly rich yields. Investors demand higher yields because they still worry that banks haven't recovered from the financial crisis. Stapley argues that the markets have overreacted. He says that risks have declined as regulators have reined in some of the excesses that caused the crisis. "The banks have a lot less leverage on their balance sheets," he says.
Besides preferred shares, Touchstone holds a mix of bonds and mortgage-backed securities. Stapley sometimes buys a company's common stock when it yields more than the bond.
Federated Capital Income yields 4.3%. During the past five years, the fund returned 7.7% annually. The neutral allocation for the portfolio is 40% in stocks and 60% in bonds. Recently, the portfolio managers have been overweighting stocks. The big equity positions helped the fund return 5.9% this year. The managers favor companies with improving fundamentals and increasing dividends. Holdings include such dividend-paying energy stocks as Chevron (CVX) and ConocoPhillips (COP).
While the fund has sizable positions in traditional dividend payers such as utilities and telecom, the portfolio is diversified with holdings in many sectors. A holding is appliance maker Whirlpool (WHR). Portfolio manager Linda Bakhshian says that Whirlpool's sales should grow as the housing market recovers. "They are increasing prices and improving margins," she says.Another holding is LyondellBasell (LYB), a Dutch chemical maker. The company has been boosting its dividend rapidly. Sales should grow as the European economies revive, Bakhshian says. At the time of publication, the author had no position in any of the stocks mentioned. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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