Historically, many retirees and pre-retirees have looked to
their portfolios as a potential source of income. In the current environment,
finding these sources is no easy task. Ten-year U.S. Treasury bonds yield only
2.2%, and dividend-paying stocks within the S&P 500 are yielding 2.5%.¹

But there are opportunities for higher yields that investors
may want to consider. Higher yields can mean greater risk, so it is important
to understand risk and potential return with any investment.

Potential Sources

When looking for yields that currently exceed U.S. Treasury
securities, you may want to review the following:

• As of September 30, 2011, corporate high-yield bonds, as measured by the Merrill
  Lynch High-Yield Master II Index, generated yields of 9.54%. Keep in mind that
  the yields of some corporate high-yield bonds compensate investors for default
  rates that historically have been higher than the broader fixed-income
  universe.²
• Higher-yielding sectors within the S&P 500 have included Telecommunication Services, which yielded
  5.59% as of September 30, 2011, and Utilities, which yielded 4.27%.³
  Standard & Poor's believes that expense control and broadband growth will
  support dividends for the Telecommunication Services sector. For Utilities,
  Standard & Poor's anticipates that higher revenue among electric utilities
  and expanding gross margins for gas utilities will cause the sector's dividend
  yield to be maintained.
• Emerging market sovereign debt, as measured by the Merrill Lynch Emerging Market
  Sovereign Bond BBB U.S. Dollar Index, yielded 4.65% as of September 30, 2011.
  Emerging market debt provides exposure to markets where economic growth
  currently exceeds the developed world while avoiding troubled European markets.⁴

Yield and Your Portfolio

The following tips may help you evaluate higher-yielding
investments at a time when finding yield remains a challenge.

• Review an investment's exposure to risk as
  well as its potential return. High-yield bonds historically have
  experienced higher default rates than investment-quality issues. Keep in mind
  that bond prices decrease when interest rates rise, opening bondholders to
  downside risk if inflation increases and market interest rates rise from their
  current lows. Holding a bond to maturity eliminates this secondary market risk.
• Diversify sources of yield. Relying too
  much on one or two income-oriented securities can leave you exposed to
  unanticipated changes in the financial markets.
• Consider your asset allocation. Since yield is available from both stocks and bonds,
  you may be able to create a high-yielding portfolio within the framework of
  your desired asset allocation. Within a stock allocation, equities within the
  S&P 500 Dividend Aristocrats have increased dividends every year for at
  least 25 years. Municipal bonds may present tax benefits for fixed-income
  investors.⁵

The variety of yield sources available presents opportunities
to craft an income-generating portfolio suitable for many different risk
profiles and time horizons.

Source/Disclaimer:

¹Yields are as of September 30, 2011. Government
bonds and Treasury bills are guaranteed by the U.S. government as to the timely
payment of principal and interest, and if held to maturity, they offer a fixed
rate of return and fixed principal value.

²Lower-quality debt securities involve greater risk
of default or price changes due to changes in the credit quality of the issuer.
They may not be suitable for all investors.

³Investments in specialized industry sectors have
additional risks, which are outlined in the prospectus.

⁴Emerging markets are generally more volatile than
the markets of more-developed foreign nations, and therefore you should
consider this increased market risk carefully before investing. Investors in
international securities may be subject to higher taxation and higher currency
risk, as well as less liquidity, compared with investors in domestic
securities.

⁵Municipal bonds are federally tax free, but other
state and local taxes may apply.

###

November 2011 — This column is provided through the Financial
Planning Association, the membership organization for the financial planning
community, and is brought to you by Ronald J VanSurksum CFP®, a local member of
FPA.

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