Tags: bond | funds | dividend | stocks

Bond Funds Go on Buying Binge for Dividend Stocks

Friday, 03 May 2013 08:15 AM

By Dan Weil

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With interest rates near record lows, bond mutual funds are turning to dividend stocks to juice their yields and protect themselves from a decline in the bond market.

The number of bond funds that hold stocks has reached its highest level in at least 18 years. According to Morningstar data cited by The Wall Street Journal, 352 bond funds owned stocks as of their last reporting date, up from 312 at the end of 2012 and 283 a year ago.

"They [bond fund managers] are reaching for yield," in the form of dividend stocks, Russ Wermers, a finance professor at the University of Maryland, told The Journal.

Editor's Note:
Use This Single Loophole to Pay Zero Taxes in 2013

The $21 million Forward Income Builder fund increased its stock allocation to 49 percent as of Feb. 28, up from almost zero in mid-2012, according to Morningstar.

So far this year that has worked out well, with the fund registering a total return of 5.8 percent, The Journal reported.

But not everyone is enamored with the change.

"We're completely sympathetic to arguments regarding yield and rising interest rates, but you can't be making decisions by yield alone," Jacob Wolkowitz, an investment manager at Accredited Investors, told The Journal, noting that bond funds will become more volatile and move in tandem with stock indexes if the stock allocation in these funds keeps increasing.

Bill Gross, co-chief investment officer at Pimco, offers mixed advice on how investors should handle the recent run-up in stocks and bonds.

"Continue to participate in an obviously central-bank-generated bubble but gradually reduce risk positions in 2013 and perhaps beyond," he wrote in his latest monthly commentary.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2013

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