How to Build a High Yielding Portfolio
High yielding portfolios are created from high-yield or "junk" bonds, covered call written on stocks, and a portfolio of long-term corporate credits with low credit investment-grade securities. Diversify a high yield portfolio even more by owning stocks and many bonds.
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Things You'll Need
- Online brokerage account for trading
- Spreadsheet to keep trading records
Instructions
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Purchase a portfolio of high-yield bonds for income and diversification. Mutual funds provide expert management and will lower the high transaction costs (the bid between the bid and asked price) associated with high-yield funds.
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Write covered calls. Create a margin account through your brokerage account to trade options. Buy stock with moderate to low dividends. Sell call options that give the buyer to right to buy your stock at a specified price. For example, a stock that yields 2 percent trades at 55 and a strike price of 60 trades call options good for one month at $1. If this trade were replicated 8 times a year the yield (regardless of the stock price) would be more than 14 percent.
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Buy long term corporate bonds near the low end of the investment grade rating of BAA-1. Corporate bonds are primarily rated by Moody's Investment Service, Standard and Poor's and Fitch. These ratings can change over time as economic circumstances change.
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Consider cumulative preferred stock that has large accrued dividends. Emerging market bonds are also sources for high yielding bonds.
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Define high yield by a yield benchmark not an absolute yield. Economic circumstances change and bond yields may vary greatly depending on changes in the economy. Choose a high yield benchmark such as the 10 year treasury bond yield plus 3 percent. Make this the target yield you must overcome.
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Tips & Warnings
Use online brokerages to keep transaction costs and fees low.
Practice trading on paper before you invest real money. These investments are not guaranteed and you can lose substantial amounts of money.
