Pimco offers 16% Yield

In a low interest world I see alot of people stretching for yield as evident in my previous post from Kiplinger Magazine.  In order to get higher yield, you have to essentially take more risk.  That risk could come in the form of moving from bonds into stocks, or moving from safer bonds, like those issued from the US Gov't to bonds issued by companies with less than stellar financials.  If you want yield, you need to make sure you understand the risk that comes along with it.  

While this site isn't interested in finding the highest yields, we are looking for a good balance of safety and income.  Today however, we are deviating from script to make a point.  We are going to look at Pimco Real Estate Real Return (PRRSX), which has a 16.70% yield paid quarterly.  This fund was just moved from 4 stars to 3 stars by Morningstar on Feb 4, 2013.  This fund has a 5 year standard deviation of 38.  By comparison, most large cap stock mutual funds have a standard deviation of 17-20.  PRRSX has essentially double the volatility of a 100% large cap stock fund.  So in your search for yield, don't just look at yield alone.  To make my point, this fund lost 47% in 2008.  If you have $100,000 invested and it drops to $53,000 or 47%, in order to get back to $100,000 your now $53,000 investment has to increase 88% just to get back to even. Losses are magnified and much more painful, so make sure you are aware of the risks. In the following two years, 2009 and 2010 the fund did earn back the 47% drop returning 54% and 39%. 

Likewise, we are big fan of dividends that are safe and somewhat predictable.  The rule of 72 states that you divide a return by 72 to find out how long it would take for your money to double.  A 8% return every year for 9 years would double your money (8% x 9years = 72).  If you take that same rule and divide 72 by 16% yield, you should technically double your money every 4.5 years.  $10,000 invested in PRRSX 5 years ago would be worth $19,724 today. 

Dividends are a very important part driver of overall returns in your portfolio and can help you temper uncertain or certain market volatility, but make sure you understand the risk and don't just look at yield alone.  Also speak with your financial advisor about the proper weighting and risk in your portfolio and overall investment plan as it pertains to making any investment decisions.  Whether risk is a preference or a requirement, make sure you understand the risk and most importantly that you can afford the risk.