Where to Find Yield in 2022

It is daunting to expect a big profit, or even any profit, over the next several months from standard bonds or bond funds. Breaking even would be acceptable while interest rates and inflation churn.

But as I consider 2022, I aver that the economy is marking time until an inevitable return to its pre-pandemic formula of 2% growth, 2% inflation and 2% long-term interest rates, which may land at 2.5% post-COVID. That’s a beneficial backdrop for plenty of income-paying investments, and now is a good time to accumulate income investments that zig when growth and inflation also zig.

I looked up 2021 returns (through November 5) for 15 of my most-trusted funds and trusts. The three most successful were Pimco Corporate & Income Strategy (symbol PCN), BNY Mellon Municipal Bond Infrastructure (DMB) and Nuveen Preferred and Income Term (JPI), with respective total returns of 15.3%, 10.3% and 9.8%. I continue to endorse all three.

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I am sold on the appeal of leveraged closed-end debt funds and also see no end to the popularity of junk bonds and floating-rate bank loan funds. All of them benefit from economic vigor; the tendency for debt-ratings upgrades; the unusually low incidence of bond defaults and loan delinquencies; and the phenomenal amount of cash out there seeking any reasonable yield.

If you value the Treasury’s full faith and credit, in­flation-linked Series I savings bonds are paying 7.12% until May because of the spike in the consumer price index. The yield will then reset, but the bonds will remain attractive. In addition, explore the following asset classes for 2022, using ETFs or closed-ends if you prefer them to individual securities:

Floating-rate bank loan funds

Fidelity Floating Rate High Income (FFRHX) is the best-known; Invesco Senior Loan (BKLN) is a cromulent ETF and one of the Kiplinger ETF 20, the list of our favorite exchange-traded funds. Keep these well fed if you already own them.

High-yield bonds

Vanguard’s offerings have the low-expense-ratio edge, but spreading money among a few managers makes sense. I prefer active management to indexing. New junk-bond yields have contracted to 4%, but capital gains can pad this.

Preferred stocks

New offerings number about one a week and offer yields of about 5%. Or try closed-end funds such as Flaherty & Crumrine Preferred Income Fund (PFD) and pounce when the premiums to net asset value tighten. Six-month-old Fidelity Preferred Securities & Income ETF (FPFD) shows great promise.

Short-term, high-rate lenders

Ready Capital (RC, $16) finances small commercial loans and mortgages; the stock yields north of 10%. RiverNorth Specialty Finance (RSF, $20) invests in an array of debt, including small-business loans. It is an interval fund; you buy it as you would a regular mutual fund but can only sell quarterly. The design lets managers hold rare or unusual high-income investments. Distributions run about 8%, cushioning share-price gyrations.

Taxable muni­cipals

These are my pick for cautious savers. These high-coupon munis sagged early in 2021 but are reviving of late. Invesco Taxable Municipal Bond ETF (BAB) distributes close to 3%, and all its bonds are rated A or better.