A Strong Investor Wants Yield Options

CDs, Treasuries, life annuity, 'Dogs' are all worth considering

Q:

In a recent column, you suggested that a reader should get out of the Strong Ultra Short bond fund. My money is in the Strong Ultra Short-Term Municipal Income fund. Its current yield is only 1.86 percent, and I believe it rates only two stars from Morningstar. I am 83 years old and need the income. Any suggestions for a five-star and higher-return fund?

A:

Let's keep the issues clear here. The first issue is whether you want to continue to do business with a mutual fund firm that appears to have ignored its primary role as a fiduciary. The answer to that is simple.

No.

The second is, what are the alternatives to a fund that is ranked "below average" by Morningstar, the Chicago investment data firm?

That answer requires a closer look at the investment terrain.

In addition to its below-average rating, your fund has ranked in the 75th, 97th and 95th percentiles over the last 12 months, three years and five years, respectively, against its peer group of some 110 short-term muni funds. The poor percentile rating results should be taken with a grain of salt – Strong Ultra Short-Term Municipal has an average maturity of just more than six months. The category average is 3.4 years. In a rising-interest-rate market, it would rank at the opposite end of the scale.

The maturity difference means you have bought a fund with minimal exposure to interest-rate risk at the expense of current income.

Only one fund in the category has a shorter average maturity, Excelsior Short Term Tax Exempt Securities fund (ticker USSSX). Alas, it rates only a single star from Morningstar. Of the six funds in the category with five-star ratings, all require either gigantic investments (more than $1 million), have much longer average maturities, or both. The blunt fact is that finding any fixed-income yield at all is pretty tough these days. Even junk bond funds are yielding only 7 percent.

What to do?

Re-examine your situation. Start by figuring out your actual tax bracket. Many older people are so tax phobic that they buy tax-free bonds even though they don't pay income taxes. Others are in the 10 percent or 15 percent tax bracket. They really shouldn't concern themselves with avoiding taxes.

If your tax bracket is 15 percent or less, simply switch to a taxable investment such as a ladder of bank CDs or Treasury obligations. Recently, for instance, Bloomberg listed the returns on two-, three- and five-year Treasuries as 2.06, 2.6 and 3.4 percent, respectively. Build a five-year ladder and you'll probably have a higher after-tax yield. You'll also have regular maturities that will reduce your interest rate risk. You can check this out at www.bloomberg.com. Look under "market data," then "rates and bonds."

I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.

Dr. David Babbel Professor Wharton School

Read 650+ verified reviews

The same applies to bank CDs. You can build a CD ladder using Web sites such as www.banxquote .com or www.bankrate.com. Visit either and you'll discover the average CD yield is very close to the yield on comparable maturity Treasuries. You can compare average CD rates vs. Treasury rates by visiting the "Bankers DOG report" on my Web site, www.scottburns .com. (DOG stands for "Deposit Opportunity Gap" and shows how much more, or less, Treasuries pay than CDs.)

Another safe tack would be to put part of the money in a life annuity. The Web site www.immediate annuity.com shows that a $10,000 life annuity for an 83-year-old male with no payments to a beneficiary would be $128 a month. That's a cash income of 15.36 percent of your investment, most of it tax-free return of capital. You could put one-seventh of your Strong investment in a life annuity and keep the remaining six-sevenths in a non-earning checking account and have about the same income as you now have.

Still another approach is to consider taking some risk and investing a portion of your money in a portfolio of high-yielding stocks. The yields on the "Dogs of the Dow" stocks (learn more at www.dogs ofthedow.com) range from a high of 6.3 percent for toxic Altria Group Inc. to 2.87 percent for ailing AT&T Corp. Pick at least five, and you'll probably get a yield of 4 percent. You could keep half your investment in cash and still have the same income you have now.

Source - dallasnews.com - 12-18-2003