Cash CowThough its yield might not pay for much more than a semester of books, the money market fund is the go-to option if for investors who want extra income with the least amount of risk. Peter Crane, president of money market and mutual fund research firm Crane Data, notes that while there are funds and bank savings accounts that both yield more than 5%, money markets can offer more flexibility than high-yield savings.
Bank-Loan FundsBonds don't generate a lot of excitement, but they're good for short-term investors who are wary of the downside. But for higher yields than typical bond funds, it could be worth looking into a loan-participation fund, also called floating-rate or bank-loan funds. These funds invest in loans issued by banks, mostly to distressed, non-investment grade companies. Since there is a greater risk of default to these companies, the interest rates on the bonds are higher than usual. S&P's leveraged loan index, which started in 1992, has never had a year of negative returns, points out Tom Brandt, one the portfolio managers at the ( XNASX) SunAmerica Senior Floating Rate fund. "The index has averaged around 6.5%, so it's not knocking the cover off the ball ... but you have good stability," Brandt says.
Dig for DividendsFinancial planners are quick to point out that if you only want to invest for a short period of time, stocks aren't the best option due to their inherent riskiness. But high-yield stocks might be a place to look for investors who want higher returns than fixed-income investing because they pay a regular dividend even if the shares take a hit. Moreover, most dividends paid out by securities held for more than 60 days have just a 15% taxation rate. "You could build a nicely diversified portfolio of stocks restricted to those that qualify for the 15% tax rule ... which would give a fairly handsome after-tax return," says Brown. Genter believes that all high-dividend stocks will, at the very least, maintain that margin through the end of the year.
A Healthy DefenseThe past few months have seen a retreat to less-risky investments amid the stock market's volatility. Consumer staples and stocks like Johnson & Johnson ( JNJ) are popular defensive plays, but David Briggs, head of equity trading at Federated Investors, likes health care further down the road. Health care may seem like an overplayed name in the defensive world, and it has gotten lots of play as another way to make money on aging baby boomers. But political saber rattling over health care during the midterm elections could help health care providers. "Health care will be hemmed in by upcoming mid-term elections," Briggs says, but he sees upward movement in the sector if the leaders who take power look like they will seriously focus on ways to cut health care costs. That means short-term traders could see a pop in their investments after the November elections, with little downside if the elections don't go in their favor.