7 Stocks to Consider Before Junk Bonds

In the clamor for high yields and income security, investors are dashing just about everywhere in the investment universe to place their bets.

Where's everybody going?
However, according to a recent article in the Wall Street Journal, there's been a particular flock to junk bonds. This makes sense considering the general stock market index is down about 5% and the threat of a double-dip recession looms large above investor's heads. Global growth has slowed, sovereign debt worries reign supreme, and unemployment remains high. Of course investors are looking at junk bonds for high yields, where else is there to go?!

Actually, Matt Hougan, head of ETF analytics at IndexUniverse, asked a similar question: "Where else can you get 8% yields"?

Well, certainly junk bonds fit the bill. But as the Wall Street Journal noted, junk bond ETFs can come with significant volatility and often trade at a significant premium to their net asset value. If you're in the mood for high yields, wild price swings, and a fund that may not perform all that well because you bought it at premium, then junk bonds may be the place for you.

Stray from the path
But why not look elsewhere?

Specifically, I decided to provide you with a list of what I think are seven better options -- all dividend-paying stocks. These stocks all have dividend yields above 8%, betas of less than one, and have managed to generate a return year-to-date, despite the difficult market. Listed below are the top seven stocks in rank order:

Company

Dividend Yield

1-Year Beta

% Return YTD

American Capital Agency (Nasdaq: AGNC  )

20.5%

0.73

2.8%

Annaly Capital Management (NYSE: NLY  )

15.4%

0.43

1.9%

Hatteras Financial (NYSE: HTS  )

15.4%

0.63

2.3%

Formula Systems (Nasdaq: FORTY  )

11%

0.99

24.3%

Gladstone Commercial (Nasdaq: GOOD  )

9.5%

0.73

17.6%

Stonemor Partners (Nasdaq: STON  )

9.4%

0.62

19.2%

Alaska Communications (Nasdaq: ALSK  )

9.3%

0.72

15.9%

Source: Capital IQ, a division of Standard & Poor's.

Now I've got to be honest -- I'm not an expert on these seven stocks, so you've got to make sure to do your own due diligence. However, what I do know is that it's likely you'd sleep better at night owning these investments than if you had a potentially crippling junk bond fund. This is a time to find high yields, but not a time to embrace volatility.

Curious why The Motley Fool just purchased one of these stocks for itself? Find out!

Jordan DiPietro owns no shares. The Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2010, at 4:25 PM, nietzschesport wrote:

    I was hoping you guys would do a evaluation Charles Nenner who is touting that the DOW will hit 5,000 in 2 and a half years. This guy has been promoted on CNBC. But get this--what's his evidence for his prediction(prophecy)? Sunspots. That's right, Sunspots. Nenner believes that Sunspots effect the generation of electromagnetic fields on earth, these in turn, effect the stock market.

    How in the world does CNBC get away with this nonsense? http://nietzschesportfolio.blogspot.com/

  • Report this Comment On August 25, 2010, at 5:22 PM, rogerb27 wrote:

    Have you seen Mad Money ?

    Sun spots seem reasonable to me.

  • Report this Comment On August 25, 2010, at 6:02 PM, starfish36 wrote:

    At least 5 of these purported junk bond substitutes are absolute dogs. If you have to have this sort of stuff, pick the bonds - only make them short term.

  • Report this Comment On August 25, 2010, at 6:10 PM, WestBend1 wrote:

    Thanks for the article, Jordan. A financial advisor was trying to get me to buy into a Junk bond fund, and he had a lot of positive reasons to buy. However, he didn't bring up any disadvantages, which is why I asked you that question in your recent article. You brought up two specific answers of why not to buy junk bonds that I had never considered. Good work.

    Ken

  • Report this Comment On August 26, 2010, at 8:22 AM, jbgoode33 wrote:

    If you're looking for more stocks with a high dividend yield, check out this list:

    http://phoenixmir2.com/DividendTop250

  • Report this Comment On August 26, 2010, at 8:52 AM, TMFPhillyDot wrote:

    @WestBend1,

    Your questions were actually a part of the reason I wrote this article, so thank you as well!

    Glad I could help!

    Foolishly,

    Jordan (TMFPhillyDot)

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