"Ginnie Maes would probably be the safest option after a straight Treasury bond," said John Coumarianos, a mutual fund analyst for Morningstar. "The only risk you really face with them is prepayment because they are mortgages." When home loans are paid off early, that curbs the interest payments to bonds that are backed by the mortgages.
If you're still hungry for higher yield and ready for another dimension of risk, check out corporate bonds. Their yields have surged to unprecedented levels, but default rates also are rising, which means you're best off sticking to companies with high credit ratings and stable balance sheets, said financial adviser Frank Ruffing, of Farragut Resources in McLean, Va.
AT&T, Hewlett-Packard and American Express bonds are among the issues offering rich yields for the risk of holding them, he said.
"If an American Express five-year note is going to pay me 7.75 percent on my money until July 2013, sure that's risky -- anything can happen in five years. But for it to really be dangerous, you would have to see AmEx get $22.5 billion of market capitalization erased before they got to your principal," he said.
Ruffing is steering clients to the Barclays iShares iBoxx Investment Grade Corporate Bond Fund, an exchange-traded fund. It holds about 100 high-grade bond issues with an average coupon of about 7 percent.
Coumarianos recommends bond funds with a mix of high-quality corporate issues, Treasurys and mortgage securities, particularly for 401(k)s and other deferred-tax accounts. He likes the T. Rowe Price Corporate Income Fund and the Pimco Total Return Fund. He's also intrigued by the Loomis Sayles Bond Fund, but lead manager Dan Fuss is known to venture into riskier areas such as lower-rated corporate issues and emerging market debt, so put no more of than 5 percent of your portfolio there, Coumarianos said.
If you're comfortable with corporate securities, another area to consider is preferred stocks. They rank below bonds in safety, but they get priority over common stock when it comes to dividend payouts or, in the case of bankruptcy, the distribution of assets.
Grubb & Ellis AGA launched a no-load fund this summer that focuses on preferred shares in real estate investment trusts, or REITS, which are yielding an average of about 13.5 percent. Favorites of Jay Leupp, senior portfolio manager for the Grubb & Ellis AGA Realty Income Fund, include preferred issues from Public Storage, Vornado and mall operator Taubman Centers.
"Compared with banks and utilities, you've got hard, tangible assets that make up 80 percent to 90 percent of a REIT's balance sheet, so you've got assets that can be liquidated if the company does get into trouble," Leupp said.
You can buy individual preferred stocks, but a fund will give you good diversity and maybe even some extra yield generated through arbitrage, which is when anomalies in the valuation of similar but separate issues can be exploited for a profit.
Either way, focus on higher-quality names, and hold them in a tax-deferred account because REIT preferreds are treated as current income, Leupp said.
But most important, spread your money wisely and don't be afraid to keep some of it in cash, even if the peace of mind costs you.
Other investments may look more enticing. Junk bonds, for example, are offering double-digit yields. But those are the bonds issued by companies with the lowest credit ratings -- and the highest probability of default. So the more yield you chase, the more risk you take on.
"The biggest hazard for investors is stretching for yield by going into places where they really shouldn't be," Ruffing said.
--CDs and Ginnie Mae bonds are options for risk-averse investors. Back Page
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