September 30, 2014
Beat Rising Interest Rates With This Monthly Dividend Payer
By Amy Calistri
Since I launched The Daily Paycheck in December 2009, a number of new securities have come on the market. Many of them have been designed to address the investing challenges specific to our times.
For instance, in the United States, the Baby Boomer generation is starting to reach retirement age. For the next twenty years, an average of 10,000 people per day will reach age 65.
When you think about all the new people who will be looking for a way to pay their monthly bills in retirement, it's not surprising that the number of monthly dividend-paying securities is also beginning to grow.
In this issue, I want to cover a unique fund that pays monthly dividends and offers a much higher-than-average yield.
There's a relatively new bond ETF with a special feature that is designed to protect investors from rising interest rates. It's called the ProShares High Yield-Interest Rate Hedged ETF (HYHG).
Given time, the financial community will find a way to cater to investors' changing needs. This bond ETF, launched on May 23, 2013, is a perfect example.
Interest rates on U.S. Treasuries have been hovering near historic lows for years in order to help stimulate the economy in the aftermath of the 2008 financial crisis. Income investors were forced to look elsewhere for yield. As a result, the demand for corporate bond funds soared.
But all fixed-income bonds are sensitive to interest rate increases. So when the central bank eventually lets rates rise again, bond prices will fall.
To protect against this risk, I sold off many of The Daily Paycheck portfolio's interest rate-sensitive holdings. And I've only highly recommended bond and bond funds with low duration -- a number used to measure interest rate sensitivity. But HYHG found a way to reduce its bond fund duration to essentially zero.
Theoretically, HYHG's price shouldn't be affected by changes in interest rates. To achieve this, HYHG's portfolio is a combination of two kinds of assets.
First and foremost, HYHG is a corporate bond fund, chock full of bonds issued by well-known companies. That being said, these corporate bonds are on the riskier end of the credit spectrum. All of the bonds have speculative credit ratings no higher than "BB+." Roughly 13% of the bond portfolio is rated "CCC" or lower.
HYHG also holds financial instruments that are designed to gain value if interest rates rise. Technically, it is short U.S. Treasuries. And theoretically, these securities should gain enough to offset any price drops in HYHG's bond portfolio if interest rates rise.
This unique ETF pays a variable monthly dividend. Its latest dividend payment was $0.352617 per share. Its average monthly dividend payment for the last year has been $0.325 per share. At current prices, HYHG's trailing 12-month yield is nearly 5.0%.
Overall, this sounds almost too good to be true. Unfortunately when it comes to fees, that may be the case. Right now, HYHG has a modest 0.5% expense ratio. But the fund is currently giving investors a cost break.
It is waiving the majority of its costs until September 30 in an effort to attract more investors. The ETF's actual expenses are running closer to 1.04% -- which is pretty high for a fund. But then again, it does cost money to hedge interest rates. But if HYHG is successful in attracting more investors, its fees should come down somewhat.
I like HYHG's above-average 5.0% yield. I like the idea behind its unique interest rate protection. And I can't wait to see how it performs if and when interest rates start to rise in earnest. But I'm not inclined to pull the trigger on HYHG just yet.
Before I invest, I'll need to see what happens to its expense ratio once its current waiver expires. But if the managers can find a way to keep the fund's costs down to a manageable level, I'll definitely revisit this unique and timely opportunity.
Because the goal of my Daily Paycheck Strategy requires a minimum of 30 dividend checks a month, I try to hold several monthly dividend payers in my portfolio. As a nice bonus, many of these carry annual dividend yields of 6.0%, 7.4%, or even 9.5%.
I talked about a few of these monthly dividend payers recently, when I was invited to speak in front of a live audience at St. Edward's University in Austin, Texas. There I told investors how I'm using them as part of my Daily Paycheck Strategy to earn an average of $1,382 per month in dividend checks. To learn more about my unique strategy -- and get a few high-yield, monthly dividend payers while you're at it -- I invite you to watch my live presentation here.
Good investing,
Amy Calistri
Chief Investment Strategist
Daily Paycheck Strategy
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