If the market is in a sideways or downward movement, you may look at overweighting in bonds. In my income portfolio, I am slowly adding bond positions as I expect the market to continue lower. With the S&P 500 and the Dow forming a head and shoulders pattern (bearish technical pattern), the markets are heading for a correction, as investors got a little too bullish too early.

JNK vs SPY

SPDR Capital High Yield Bond Portfolio ETF (JNK) gets it ticker from the bonds the ETF holds which are less than investment grade. Since they are less than investment grade, many refer to them as “junk bonds”. When compared to a two-year chart with the S&P 500, SPDR Capital High Yield Bond Portfolio ETF (JNK) outperformed the S&P 500 SPDR ETF (SPY). Not only did JNK significantly outperform but it also returned a monthly dividend currently yielding around 14%.

Other High Yield Bond ETFs

iShares iBoxx High Yield Corporate Bond ETF (HYG) and PowerShares High Yield Corporate Bong ETF (PHB) are two more ways to play high yield bonds as they track different indexes and currently yield 10.5% and 11.26%, respectively.

DISCLAIMER: I do own shares of JNK.

High yield savings accounts are a great place to stash cash for an emergency fund but the interest earned is not likely to keep up with inflation. For investors that are looking for high yields that will surpass that of inflation, three investment options to produce income are high yield bonds, master limited partnerships (MLPs), and real estate investment trusts (REITs).

High yield bonds, MLPs, and REITs are a great way to increase your portfolio’s dividend income. Most of these investments had very little price action until the current recession started. When the economy starts to recover, these investments will move with the market and feed you a nice monthly dividend. The following investments are worth a look if you are building an income portfolio.

High Yield Bonds

iShares Corporate High Yield Bond ETF (HYG) that offers an 11.56% yield gives investors a diversified high yield corporate bond portfolio through one ETF. Another way to invest in high yielding corporate bonds is through the SPDR Barclays Capital High Yield Bond Funds (JNK), which yields 14.86%. Note these high yielding bonds carry more risk than the investment grade bond ETFs such as iShares Investment Grade Corporate Bond ETD (LQD) yielding only 5.96%.

Oil/Natural Gas Trusts

Pengrowth Energy Trust (PGH) is Master Limited Partnership (MLP) based in Canada, which explores and develops oil and natural gas operations. If you are looking for high yield exposure to oil but with a diversification of natural gas, try PGH, which yields 12.6%

Penn West Energy Trust (PWE) is another Canadian based oil and natural gas trust that yields 11.2%.

MLPs have a different tax structure; one that taxes dividends as ordinary income. With Canadian Trusts, you will pay a foreign tax on the dividends before you receive the dividend. This foreign tax is deductable from your end of year taxes.

Real Estate Investment Trusts (REITs)

Most individual investors do not have, or access to, the funds required to purchase real estate but through REITs small investors have a wide variety of real estate from which they can choose to invest in. I have listed three REITs below that you might want to look into.

Entertainment Properties Trusts (EPR), currently yielding 12.5%, is the largest Real Estate Investment Trust. EPR holds a variety of entertainment properties from movies theaters, which makes up about 50% of its holdings, to retail centers and land leased out to restaurants.

Health Care Property Trusts (HCN), currently yielding 8.5%, invests in real estate used for medical purposes ranging from senior housing to medical office buildings.

Vanguard REIT ETF (VNQ), which currently yields 12.26%, is an exchange traded fund, or ETF, that diversifies its holdings through various REITs. If you want to invest in REITs but want one diversified holding, this would be the ETF for you.

Bond ETFs and MLPs usually pay a monthly dividend, which makes them attractive to income investors. Please research the risks associated with each investment before investing. The companies listed above are just a few within their respective market.

Note: Tax rates on some of the above investments are that of ordinary income. With the recent rally, I would expect most of these investments to come down in price.

Looking for investment income? I am a more active trader using day and swing trading but when I am not compounding my earnings from day/swing trading; I am feeding an income portfolio. I like to use ETFs (Exchange Traded Funds) for income investing because I don’t have the time to research individual stocks. Buying an ETF gives me exposure to multiple stocks and bonds or whatever the ETF tracks without doing much research. If you have more time, individual stocks can be more profitable but also inherit more risks, if you’re wrong.

iShares Aggregate Bond Fund (AGG)

iShares Aggregate Bond Fund (AGG) tracks the Barclay’s Capital U.S. Aggregate Index which invests mostly in investment grade bonds. AGG currently yields 4.64%.

iShares Investment Grade Corporate Bond Fund (LQD)

Looking for a little more risk in the bond market? Try iShares Investment Grade Corporate Bond Fund (LQD) which invests in Corporate Bonds and currently yields 5.61%.

iShares TIPS Bond Fund (TIP)

iShares TIPS Bond Fund (TIP) tracks Barclays Capital U.S. TIPS Index. This ETF is invested at least 95% in Treasury Inflation Protection Securities. The ETF is also a great hedge for inflation with all the new money the government is printing. TIP currently yields 6.34%.

PowerShares Dividend Achievers (PFM)

If you are a fan of the S&P High Yield Aristocrats (SDY) but want more diversification try the PowerShares Dividend Achievers which only hold 17% of it holdings in financials services sector, followed by industrial services and consumer goods: each with 15%. PFM currently yields 3.57%.

When looking at dividends, don’t forget the yield is from historical dividends and many companies such as one from the financial sector have cut their dividend, if not completely eliminating it.

Always Check Sector Holdings

An ETF like PowerShares High Yield Dividend Achievers (PEY) might grab your attention as something that you would want to invest in, but take a look at the sector holdings below:

With almost 70% of holdings in the financial sector, this ETF lacks diversification. Why not just buy a financial ETF such as the XLF (Financial Select Sector SPDR)?

As with any investment do your research. Income ETFs might be good for a source of income but usually don’t offer much for growth.

Looking for a portfolio that generates you a monthly income? With the following ETFs (Exchange Traded Funds), you can build a core portfolio that gives you a monthly income while have a diversified portfolio. Many investors prefer income or dividend investing for the monthly income, while other like the idea of compounding interest.

The list of ETFs below gives you some of the best global dividend paying stocks, US Treasuries, and preferred stocks. When creating this small portfolio, I wanted to have a few ETFs to help keep commissions low while producing a monthly income. Preventing overlapping as much as possible was second on my list. Many people buy ETFs without looking at the holdings failing to realize that one stock is a top 10 holdings in each of the ETFs, thus, killing the rule of diversification.

The Core ETFs For An Income Investor’s Portfolio

• SPDR S&P 500 Dividend (SDY) – S&P 500 dividend achievers is composed of the best dividend paying stocks in the S&P 500. Currently yields 5.45%.
• PowerShares International Dividend Achievers (PID) – Staying diversified, this ETF has some of the best global dividend paying stocks. Currently yields 6.82%.
• Vanguard Total Market Bond ETF (BND) – Top 10 holding are US Treasury Bonds. This bond fund aims at bonds maturing in 3-5 years (intermediate term). Currently yields 4.5%.
• iShares S&P 500 Preferred Stock Index (PFF) – This ETF is composed of nothing but preferred stocks from the S&P 500. Currently yields 9.49%.

Starting off you might want to allocate 25% to each of the ETFs listed above. As you build this portfolio up, you might want to cut back you allocations to 15% to 20% giving you 20%-40% to buy individual stocks or trade short term trends to build cash.

If you have a large amount to start the portfolio you might also look into some Real Estate ETFs, such as Vanguard REIT Index ETF (VNQ) which currently yields 8.22%.