Mutual Fund Buzz for October 12: The Search for Yield

Here are some options for yield-starved investors.

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Is there a bond bubble brewing? In a recent post on The Smarter Investor blog, financial adviser Doug Lockwood examines what fixed-income investors should be concerned about in today's low interest-rate environment. "Quite simply, when interest rates go up, the value of existing bonds goes down because new bonds issued under higher interest rates are naturally more in demand than old bonds paying out under lower interest rates," he writes. To protect yourself from rising rates, Lockwood suggests a range of options, including buying treasury-inflation protected securities, low-duration bonds, and higher yielding, dividend-paying stocks. No one can predict when rates will go up, but Lockwood says that after an asset class has seen a huge surge in investments, sooner or later, the bubble will burst.

[See U.S. News's Why You Should Invest in Corporate Debt.]

Morningstar's director of personal finance, Christine Benz, recently discussed dividend-paying stocks in this article. She cautions investors that while high-quality bonds and many dividend-paying stocks provide investors with a steady income, there are big differences in the level of risk that investors are taking on when they buy stocks. Aside from the risks involved with investing in dividend-paying stocks, Benz says buyers should be aware of the annual fees of dividend-focused stock funds. Also, some funds hold stocks with higher yields than others, and some funds focus on stocks that have longer histories of consistently offering a decent yield. For interested investors, here are 7 highly-ranked dividend funds.

[See U.S. News's 6 Reasons to Buy Dividend-Paying Stocks.]

Regardless of what area of the market you're investing in, it's important to know when to dump your mutual fund. Marketwatch fund guru Chuck Jaffe says Vanguard's decision to fire some of its sub-advisers should teach investors an important lesson. The fund company recently fired the Alliance Bernstein staff that managed the Vanguard U.S. Growth fund because of its poor performance.

Marketwatch: Know when to dump a losing fund

For more investing advice, see U.S. News's newly launched The Smarter Investor.