Wednesday, February 8, 2012

Investments for Income Lovers - Motley Fool

If you're an investor in search of yield, recent years have not been kind to you. With interest rates at historical lows, folks are having a hard time squeezing any meaningful income out of their investments. While you don't want to go out too far on a limb in search of higher yields, there are some steps you can take to boost your portfolio's income-producing properties.

In this four-part series, I'll shine a spotlight on some of the best income-producing actively managed stock funds, exchange-traded funds, and bond funds in the business. While yield is a primary consideration in my analysis, it's not the only one -- I also want investments with strong long-term growth potential and solid management in charge. To kick off this series, let's turn to two stock-centered active mutual funds with serious income potential.

Vanguard Equity-Income (VEIPX)
This stock fund utilizes a mix of fundamental and quantitative analysis to identify attractively priced, high-dividend-yielding stocks. Investment manager Wellington Management runs roughly 60% of the portfolio and focuses on high-quality companies with strong underlying businesses. The remaining 40% of the fund is run by Vanguard's own quantitative group and relies on computer models to pick reliable income-producers.

The resulting portfolio is a well-diversified mix of roughly 150 high-quality blue chip names. Recent additions to the portfolio include Lowe's, ConAgra Foods, and electric utility firm NiSource (NYSE: NI  ) , whose yields range from 2.1% in the case of Lowe's to 4% for NiSource.

Like many high-quality, value-oriented funds, Vanguard Equity-Income is built to hold up better in times of market turmoil, besting the S&P 500 by more than 6 percentage points in 2008's bear market. And while the fund won't dazzle in years when more speculative investments hold sway, such as in 2009, the portfolio's long-term track record is first-rate. In the past decade and a half, the fund has generated an annualized 7% return versus 5.5% for the S&P 500 Index. This showing puts the fund ahead of 86% of all large-cap value funds in the Morningstar fund universe. Over the most recent 12-month period, the fund's trailing yield was a reasonable 2.72%.

That won't make anyone rich overnight, but when combined with the long-term capital appreciation the portfolio has managed to produce, investors should be quite happy here. The cherry on top of this well-run fund is its low 0.31% expense ratio, making it a solid choice for price-conscious, yield-seeking stock investors.

Vanguard Wellington (VWELX)Wellington is actually a balanced fund, investing in a mix of stocks and bonds, so investors in search of yield would do well to give this one a second look. This fund is run entirely by the aforementioned Wellington Management, which devotes approximately 65% of assets to equities and the remaining 35% to bonds.

Not only does this balanced approach dampen volatility and reduce risk by adding bonds into the mix, it gives the fund's yield -- 2.92% at last glance -- a boost. On the stock side, management looks for dividend-paying large-cap names that are temporarily undervalued but still boast strong business models and solid long-term growth prospects. The bond portion of the portfolio sticks primarily to investment-grade corporate bonds, which adds yield and return potential without bumping up risk.

Right now, financials and health-care stocks are getting a lot of play in the fund. For instance, management favors industry leaders Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) for their attractive yields and relatively untapped pricing power.

With its low-risk profile, Vanguard Wellington has made mincemeat out of the vast majority of other balanced and moderate allocation funds -- over the most recent 15-year trailing time period, the fund ranks in the top 7% of its peer group with a 7.7% annualized gain. This fund isn't made for speed, but it is built for the long haul and should continue to provide investors with the trifecta of investing goals -- long-term capital gains, dividend income, and low volatility. For a rock-bottom 0.30% price tag, you won't do much better than Vanguard Wellington.

Amanda Kish
is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Motley Fool newsletter services have recommended buying shares of Lowe's and Pfizer, as well as writing covered calls on Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.