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'Forever' Funds: The Safest High-Yield Funds on the Planet (Part II)

Chad Tracy

Regular StreetAuthority readers have probably heard us talk about "Forever Stocks" before. These are stocks of solid, blue-chip companies that pay rising dividends and hold sustainable competitive advantages. The idea is that you can essentially buy them, forget about them, and hold them forever.

In the first part of this article, we talked about three funds based on the same principle. These funds are the type of holdings that could form the core of any dividend investor's portfolio. These "Forever" funds are made up of the most solid, stable, dividend-paying stocks on the market -- companies like AT&T (NYSE: T), Coca-Cola (KO), and Wal-Mart (WMT).

None of these funds will make you rich overnight, but that's not the point. These funds are designed for the investor who'd rather spend time golfing or playing with the grandkids instead of nervously tracking ticker symbols or trying to predict what the Federal Reserve might do next.

In today's article, we're going to take a look at two more funds that take a slightly different approach from the three mentioned in the previous article. One is a fund that focuses on dividend stocks outside the U.S. The other is a fund that tracks one of the most exciting investment opportunities to come along in years: master limited partnerships (MLPs).

PowerShares International Dividend Achievers (PID)
PID allows investors exposure to solid dividend-paying companies overseas. The fund weights holdings by dividend yield. To qualify, companies must have raised dividends for at least the past five years.

The portfolio's current top five holdings are Teekay Offshore Partners (TOO), Teekay LNG (TGP), TELUS Corp. (TU), Vodafone (VOD), and GlaxoSmithKline (GSK). These five make up 19% of the overall portfolio.

StreetAuthority expert Elliott Gue has had Teekay LNG in his High-Yield PRO portfolio since April 2011. So far, readers are up over 33% on the recommendation.

When you take a closer look at these holdings, it's easy to see what they all have in common: solid yields in the 4% to 6% range.

The fund has performed well over the past three years, up 23% (not including dividends).

PID is well diversified across market sectors, with energy making up 20%, telecom 16%, health care 14%, financials 12% and consumer staples 12%.

PID also serves as another form of diversification. By investing in overseas firms it offers exposure to profits in currencies other than the dollar. Earning profits in euros and British pounds can help serve as a hedge against any future weaknesses in the U.S. dollar.

One strike against PID is its relatively high expense ratio of 0.52%. While this expense is more than offset by the current 2.2% dividend yield, it still makes PID more expensive than the three funds I profiled in the first part of this series. 

JPMorgan Alerian MLP Index (AMJ)
AMJ is a closed-end fund that tracks the 50 largest MLPs on the market.

Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. MLPs combine the tax advantages of a partnership with the liquidity of a publicly traded stock.

MLPs allow for pass-through income, meaning that they are not subject to corporate income taxes. Instead, owners of an MLP are personally responsible for paying taxes on their individual portions of the MLP's income, gains, losses, and deductions. This eliminates the "double taxation" generally applied to corporations (whereby the corporation pays taxes on its income and the corporation's shareholders also pay taxes on the corporation's dividends).

The fact that MLPs are not subject to income tax means that more cash is available for distributions. This generally makes MLP units worth more than similar shares of a corporation.

AMJ allows investors to earn a high yield across a wide variety of MLPs without the tax headaches that come from investing in individual MLPs. Regular MLP investors must fill out a Schedule K-1 document for every state in which the MLP operates. But AMJ distributions are reported on a single 1099 form, making things much easier come tax time each year.

The MLPs in AMJ's portfolio operate primarily in the energy industry and are involved in the exploration, production, transportation, and processing of oil and natural gas. 

This sector of the economy has been covered extensively by StreetAuthority expert Nathan Slaughter in his newsletters. He recommended MLP Spectra Energy Partners (SEP) last November, and so far his subscribers are up almost 50% on the recommendation in just eight months.

This sector of the U.S economy has been booming over the past three years, and AMJ's share price has been booming right along with it, up 49% during that time.

By law, MLPs must distribute at least 90% of income to investors. So as you might expect, AMJ currently boasts an attractive dividend yield of 4.5%. And because the MLPs in the portfolio rely more on the volume of energy moving through the system than the prices of the commodities themselves, the overall portfolio is much less volatile than the commodity market for oil and gas as a whole.

AMJ charges an annual expense ratio of 0.85%, which is high compared with the other funds we've looked at but par for the course for MLP index funds.

Because AMJ became a closed-end fund in 2012, there are a limited number of shares available. The downside to this is that now the shares are more likely to trade at a premium to net asset value.

Risks to Consider: Although PID can help investors diversify by investing in overseas companies, the fund's holdings are heavily weighted toward European holdings. Further financial troubles in the European Union could have a negative impact on PID's value.

AMJ is an exchange-traded note (ETN), which exposes investors to the credit risk of the underlying issuer. In this instance, if JPMorgan Chase were to go bankrupt, AMJ shares could drop to zero.

Action to Take --> PID and AMJ are great investments for investors looking to diversify their holdings. For both funds, it is best to wait until net asset values are close to even or (even better) selling at a discount before purchasing shares.

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