How to Find High Yields in Today's Market (2023)

Late to address the inflation challenge, the Federal Reserve Board has made up for lost time by jacking up the federal funds rate (the rate banks charge each other for overnight loans) by 4.75 percentage points since March 2022.

The rate hikes have not yet slain the inflation bogeyman — but did succeed in crushing stock and bond markets in 2022. Now the Fed must also weigh the risks of a banking crisis and possible recession in determining its path forward. If there is one silver lining from the dramatic tightening of monetary policy, it is that much-higher rates have produced some attractive yields for investors in bonds and some other asset classes. “Investors have opportunities in all kinds of income-producing categories that they haven’t had for 15 years,” says Andy Kapyrin, co-chief investment officer of CI RegentAtlantic Private Wealth (opens in new tab).

Yields are respectable again in Treasury securities and high-grade corporate IOUs and much plumper in riskier high-yield bonds. Weaker stock prices and increases in dividend distributions have created opportunities in stocks and energy-infrastructure businesses, with the additional advantage of providing some protection against rising consumer prices. As a result of jumpy markets, shares of many closed-end funds and business development companies (a new category in this year’s income survey) are selling at significant discounts to the value of the assets in their portfolios. This guide will help you find attractive income-producing investments in nine different categories, ranging from low-risk, ordinary securities to rather complex, high-risk offerings with the potential for high returns. Although yields and risk typically move higher in lockstep, that’s not always the case this year, and we’ve listed investments roughly in order of ascending risk.

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Before you reach for some handsome yields, though, keep a few considerations in mind. You should have a financial plan that targets long-term portfolio allocations. Everyone’s financial picture is unique, but generally speaking, you should ensure that you have enough cash or cash equivalents on hand to cover a minimum of six months’ worth of living expenses before you invest in high-risk/high-return assets. Prices, yields and other data are through March 31, unless otherwise noted. Be aware that as interest rates jump around, yields on bond funds are a fast-moving target.

The Best Options For High Yields

5% Short-Term Accounts

Yields on short-term, fixed-income accounts and securities take their cue from Fed policy, and that is resulting in some attractive yields for cash and other short-term liquid assets. “Instruments with little risk finally are offering respectable yields,” says Kapyrin. After years of famine, investors now have some tasty yields to feast on.

THE RISKS: Rates are unusually volatile this year, which means that when short-term investments mature, it’s hard to know what yields will be on offer. Safe cash equivalents are required for emergency reserves and to meet near-term liabilities, such as taxes and tuition payments. But particularly in this era of high (and unpredictable) inflation, excessive cash balances are a drag on purchasing power.

HOW TO INVEST: The stunningly rapid rise of interest rates has created some distortions. For example, even with 4%-to-5% yields available today in low-risk assets, many banks are still paying customers less than 1% on their deposits. “People who have their money in banks are asleep,” says Lew Altfest, chief investment officer of Altfest Personal Wealth Management (opens in new tab).

• Money market mutual funds trade daily, which can be important for liquidity, and funds such as VANGUARD FEDERAL MONEY MARKET (VMFXX, YIELD 4.8%) offer attractive yields.
• An FDIC-insured certificate of deposit from online savings bank MARCUS BY GOLDMAN SACHS pays 5.1% on a 10-month deposit with a $500 minimum balance.
• Treasury bills, which are free from state and local taxes, have a substantial advantage over CDs and other interest-bearing assets in taxable accounts, in high-tax states such as New York and California, notes Kapyrin. One short-term Treasury exchange-traded fund he uses in client accounts is GOLDMAN SACHS ACCESS TREASURY 0-1 YR (GBIL, $100, 4.5%). ISHARES 1-3 YEAR TREASURY BOND (SHY, $82, 4.6%) also holds a basket of Treasuries, but its higher duration (a measure of interest-rate sensitivity) puts it more at risk if rates keep rising (rates and prices move in opposite directions). Default is not a risk with these funds, but you can lose money in either because net asset values fluctuate daily with changes in bond prices.

4-5% Municipal Bonds

Issued by U.S. states and local governments, muni bonds pay interest that is free from federal taxes — and for bonds issued in your state of residence free from state and local taxes as well. High-quality, investment-grade munis (you can also find riskier, high-yield munis) tend to perform well in a recession and, like Treasuries, can benefit from a flight to securities seen as safe havens in turbulent bond markets, such as we have experienced in 2023.

THE RISKS: Since muni bond prices have moved higher in sympathy with Treasuries, munis are not a screaming value today. “You really need to be in the highest tax brackets in high-tax states for munis to make sense,” says Kapyrin. However, thanks in part to bountiful COVID-related relief, municipal government finances are generally sound and, like Treasuries, the asset class can play a useful diversifying role in a portfolio.

HOW TO INVEST: To calculate and compare the tax-equivalent yield of a muni to a Treasury or other taxable bond, simply divide the yield by 1 minus your federal income tax bracket.

For example, for someone in the 24% tax bracket, the tax-equivalent yield of a muni bond yielding 3% is 3.95% (3%/1–0.24). You can gain exposure to well-diversified baskets of investment-grade muni bonds by investing in a national muni fund.

• Actively managed VANGUARD INTERMEDIATE-TERM TAX-EXEMPT (VWITX, 3.2%) holds 12,400 bonds, 90% of which are rated A or higher, and has a duration of 4.8, which implies a loss of approximately 4.8% if yields move up by one percentage point. For a taxpayer in the 24% federal bracket, the tax-equivalent yield is 4.2%, or 5.1% for someone in the highest federal bracket of 37%.
• You can do slightly better on yield with VANGUARD TAX-EXEMPT BOND (VTEB, 3.3%), which has a rock-bottom expense ratio of 0.05% but comes with a higher duration of 5.9. The tax-equivalent yield is 4.3% for investors in the 24% bracket, or 5.2% for those in the 37% bracket.
• Mary Ellen Stanek, president of Baird Funds (opens in new tab), notes that the farther out on the yield curve you go, the more attractive munis start to look compared with taxable bonds. For example, a five-year muni’s yield is less than two-thirds that of a Treasury of the same maturity but 92% the yield of a 30-year Treasury.
• FIDELITY MUNICIPAL INCOME (FHIGX, 3.4%) has a duration of 7.4 and tax-equivalent yields of 4.5% and 5.4% for taxpayers in the 24% and 37% brackets, respectively. The fund is heavily weighted toward revenue bonds (as opposed to general obligation issues), which are supported by specific projects — in this case, mostly in the healthcare and transportation sectors. The two largest state exposures are Illinois and Pennsylvania.

4-5% Investment-Grade Bonds

The core of a typical fixed-income portfolio comprises investment-grade bonds issued by the U.S. Treasury, government agencies (mortgage-backed securities, for instance) and corporations. Prior to 2022, when interest rates surged, these assets offered little income. That has changed dramatically over the course of the past year.

“Investment-grade bonds are a compelling asset class today and have restored their ability to diversify portfolios,” says David Albrycht, chief investment officer of Newfleet Asset Management (opens in new tab). In short, bonds are back.

THE RISKS: Last year was one of the worst years for bonds in history, owing to those surging rates. The Bloomberg U.S. Aggregate Bond index, which tracks intermediate-term investment-grade paper, slumped 13% in 2022. But that was then. One new risk is that some investors are so shellshocked from losing money on high-grade bonds in that dreadful year that they don’t take advantage of today’s much higher yields (and lower risk due to the interest rate starting point).

HOW TO INVEST: One thing that excites Kapryin is that investors can again earn positive real yields (the yield minus the inflation rate) on Treasuries and corporate bonds after losing money on an inflation-adjusted basis in 2021 and 2022. For example, he notes that real yields on intermediate-term corporate bonds are 2% to 3%. “After inflation, you’re talking about a yield that is back to normal,” he says.

• FPA NEW INCOME (FPNIX, 4.1% as of February 28) has a sterling record of risk management and protecting shareholders’ capital. Abhijeet Patwardhan (opens in new tab), the manager, says he has been extending the duration of the portfolio (roughly 2, currently) over the past 18 months with the increase in interest rates. He’s particularly fond of structured products, such as mortgage- and asset-backed securities, which, unlike most corporate bonds, are secured by the asset in which you’re investing. “We find that you can get better yields than on Treasuries or corporate bonds of comparable maturities,” he says.
• Securitized asset-backed products are the stock-in-trade of Jeffrey Gundlach’s DOUBLELINE TOTAL RETURN BOND (DLTNX, 4.9% as of February 28). Jeffrey Sherman, DoubleLine (opens in new tab)’s deputy chief investment officer, says the fund has extended its average duration from 4 at the start of 2022 to 6.3, the longest in the fund’s history. “You get paid to take risk now,” he says. Sherman notes that Total Return has also upgraded the portfolio’s credit quality by moving more into government-guaranteed assets, such as agency mortgage-backed securities.
• For something more diversified, consider BAIRD AGGREGATE BOND (BAGSX, 3.9%). Piloted by Baird’s co-chief investment officers, Stanek and Warren Pierson, this intermediate-term fund (its duration is 6.3) invests in government and corporate debt along with asset-backed securities. The fund is a recent addition to the Kiplinger 25, the list of our favorite no-load, actively managed funds.

7%–10% High-yield Bonds

That is because yields are relatively high, and the average junk bond sells at only 88 cents on the dollar. “Bonds are trading at discounts even if they are issued by fundamentally solid companies,” says Breazzano.

• Of course, it also helps if you have a seasoned risk manager like Carl Kaufman, who has steered OSTERWEIS STRATEGIC INCOME (OSTIX, 7.3%) since 2002. Kaufman says the fund’s duration is 2.5, compared with 4.1 for the high-yield market overall, and that he is avoiding cyclical commodities businesses whose fortunes tend to rise and fall with the economy. Instead, he’s searching for companies that have pricing power and a strong competitive position. “We’re looking for business models that don’t depend on the economy being super strong and whose managements understand the importance of a strong balance sheet in times of stress,” he says.
• PGIM HIGH YIELD (PHYZX, 9.9%) makes the most of an army of 50 credit analysts, many of them focused on specific industries, according to Robert Cignarella, head of U.S. high yield at PGIM Fixed Income (opens in new tab) (PGIM is the asset-management division of Prudential Financial). Cignarella says the fund (duration: 3.8) has an overweight position in the bonds of housing and building-product firms because there is a serious housing shortage. He also likes electric-power generators due to strong pricing power and underinvestment in power that will need to be addressed to fuel the electrification of the country’s auto fleet.
• For something slightly tamer, consider VANGUARD HIGH-YIELD CORPORATE (VWEHX, 7%), which focuses on higher-rated junk bonds. A member of the Kiplinger 25, the fund holds a basket of nearly 800 bonds, more than 80% rated B or BB. The fund has a duration of 3.9.

4%–7% Dividend Stocks

• He spots value in FIFTH THIRD BANCORP (FITB, $27, 5.0%), a conservatively managed Midwest bank with low levels of uninsured deposits and virtually no held to-maturity securities on its balance sheet (both issues helped to topple Silicon Valley and Signature banks).
• The portfolio managers at Tweedy, Browne (opens in new tab) — dyed-in-the-wool value investors — also see bargains in the sector. They like TRUIST FINANCIAL (TFC, $34, 6.1%), a Charlotte, N.C.–based super-regional bank, for its strong footprint in the buoyant Southeast economy and diversified earnings stream. Jay Hatfield, chief executive of Infrastructure Capital Management (opens in new tab), fancies PRUDENTIAL FINANCIAL (PRU, $83, 6.1%), a large, diversified insurance company that sells products such as life insurance and annuities. “It’s getting dragged down with banking stocks, even though it’s not a bank and its fundamentals are good-to-great,” he says.
• VERIZON COMMUNICATIONS (VZ, $39, 6.8%), the largest wireless carrier, offers a juicy yield and sells at just eight times estimated earnings. It’s a member of the Kiplinger Dividend 15, our favorite dividend stocks. If you prefer to invest in a diversified basket of dividend stocks, consider SCHWAB US DIVIDEND EQUITY (SCHD, $73, 3.5%), an exchange-traded fund (and a member of the Kiplinger ETF 20) that holds 100 stocks (top positions include Abbvie and PepsiCo) and has a stellar track record of boosting dividends each year.
• Finally, consider overseas stocks, which offer significantly higher yields than do their counterparts at home, according to Tweedy, Browne’s Robert Wyckoff. One of Tweedy’s picks is DEUTSCHE POST (DPSGY, $47, 4.1%), which owns DHL, one of the top parcel-shipping and third-party logistics outfits worldwide. For a diversified foreign portfolio, the U.S. Schwab fund has a cousin, SCHWAB INTERNATIONAL DIVIDEND EQUITY (SCHY, $24, 4.4%). Top holdings include Unilever and Deutsche Post.

3%–7% Real Estate Investments

• This setup drew Jeff Kolitch, manager of Baron Real Estate Income (opens in new tab), to INVITATION HOMES (INVH, $31, 3.4%), the largest owner and operator of single-family rental homes in the country, with more than 80,000 units. Kolitch also likes the economics of self-storage REITs, which tend to be recession resistant and have high cash flows, low capital spending needs and “sticky” tenants with short leases. EXTRA SPACE STORAGE (EXR, $163, 4.1%) is an example.
• Healthcare facilities are benefiting from the aging of society and a steady increase in health spending. Accordingly, Kolitch recommends WELLTOWER (WELL, $72, 3.4%), which operates outpatient medical facilities and senior housing, a strong growth sector. Mathew Kirschner, a U.S. real estate portfolio manager at Cohen & Steers (opens in new tab), is attracted to HEALTHCARE REALTY TRUST (HR, $19, 6.6%), which owns and operates medical offices, most of which are affiliated with hospital systems.
• Industrial REITs are similarly benefiting from robust, long-term demand drivers. “Warehouse space is perhaps the most compelling category of commercial real estate, as consumers and businesses seek faster and faster delivery of goods,” says Kolitch. He particularly favors EASTGROUP PROPERTIES (EGP, $165, 3.1%) for its focus on fast-growing 4%–11% | CLOSED-END FUNDS Sunbelt states, including Texas and Florida.
• Finally, despite growing worries about a potential recession, some fund managers, including Infrastructure Capital Management’s Hatfield, are fond of SIMON PROPERTIES (SPG, $112, 6.7%), the nation’s largest shopping-mall owner. “The notion that the mall is dead is incorrect,” says Hatfield. “People do not want to be at home all day — particularly if they worked all day at home.”

6%-10% Midstream Energy Infrastructure

• Dan Genter, president of RNC Genter Capital Management, likes ENBRIDGE (ENB, $38, 6.9%), a conservatively run Canadian energy infrastructure giant that moves about 30% of the crude oil produced in North America and 20% of the natural gas consumed in the U.S. Lack is drawn to outfits with strong natural gas franchises, including WILLIAMS COMPANIES (WMB, $30, 6.1%), which operates an “irreplaceable” pipeline network and, like Enbridge, is registered as a corporation. For a higher yield, consider ENERGY TRANSFER LP (ET, $12, 9.8%), an MLP that is constructing a large LNG export facility in Lake Charles, La., that will convert natural gas to LNG for shipment overseas.
• For a basket of energy-infrastructure businesses, consider PACER AMERICAN ENERGY INDEPENDENCE (USAI, $26, 5.5%) or Lack’s actively managed CATALYST ENERGY INFRASTRUCTURE (MLXIX, 7.3%). Both funds hold American and Canadian stocks and, by keeping the MLP weighting to less than 25%, avoid the need to issue K-1s.

4%-11% Closed-End Funds

• Munis have always been a staple of the industry because leverage can pump up tax-free yields. Because high-grade munis are low-risk assets, fund managers can apply more leverage than they can with volatile asset classes, such as stocks, O’Neill says, adding that unusually large discounts have created attractive opportunities.
• John Cole Scott, chief investment officer of Closed-End Fund Advisors (opens in new tab), recommends NUVEEN QUALITY MUNICIPAL INCOME (NAD, $12, 4.1%), which trades at a 13% discount to NAV (that is, 87 cents for a dollar of assets) and has a 39% leverage ratio (borrowed money as a percentage of assets). The tax equivalent yield for someone in the 24% federal bracket is 5.4%. Nuveen is one of the largest and oldest managers of muni bond funds.
• Higher yields are on offer in taxable high-yield funds. Scott likes ARES DYNAMIC CREDIT ALLOCATION (ARDC, $12, 10.8%), which sells at a 13% discount and employs 35% leverage. The fund holds principally high-yield bonds and bank loans, with top issuers including Uber, MGM Resorts and American Airlines.
• If you like the idea of buying a dollar of assets at a steep discount but want to avoid the risk of leverage, Scott suggests ABRDN GLOBAL INFRASTRUCTURE INCOME (ASGI, $18, 8.0%), which has no leverage, trades at a 15% discount to NAV and holds a global portfolio of infrastructure-related stocks, an asset class that tends to perform well in inflationary environments.

11%–12% Business Development Companies

• Alex Seleznev, director of wealth management and financial planning at Councilor, Buchanan & Mitchell (opens in new tab), is comfortable holding ARES CAPITAL (ARCC, $18, 10.5%). It’s the largest firm in the business, with a $22 billion portfolio of several hundred loans with broad geographic and industry diversification. Ares trades at a 1% discount to NAV and has a leverage ratio of 55%, which is about average.
• Scott, of Closed-End Fund Advisors, recommends CAPITAL SOUTHWEST CORP. (CSWC, $18, 11.9%), the oldest BDC, and OWL ROCK CAPITAL (ORCC, $13, 10.5%). Both have leverage ratios of just over 50% and predominantly hold senior secured loans. Capital sells at a 9% premium to NAV; Owl Rock, a 16% discount.
• Invest in a basket of BDCs with VANECK BDC INCOME (BIZD, $15, 10.8%). The ETF tracks a market-weighted, concentrated BDC index — the top three holdings, which include Ares and Owl Rock, account for 45% of assets. ■

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