10 Best High-Yield Bond Funds Of February 2024 (2024)

Improving credit quality is a plus for American Funds American High-Income Trust. This high income bond fund has recently tightened the reins on the riskiest CCC debt and bulked up on safer BB and B rated debt. While lowering the fund’s overall yields slightly, it also decreases AHTFX’s default risk. Amid continued Fed rate hikes, AHTFX’s dividend yield has trended upward for more than a year. So, while the share price of this fund has fallen, the shift to higher credit quality debt also offers the prospect of capital appreciation when rates begin to fall.

AHTFX’s total return outperformed its Morningstar high-yield bond fund group average over the previous three, five and 10 years. With more than 900 individual bonds, and a handful of equities and other assets, default risk is negligible and downside volatility is low. Investors seeking stable cash flow and potential appreciation should appreciate AHTFX’s average effective duration of around three years and average yield to maturity of over 8%.

Fidelity’s Floating Rate High Income Fund managers follow a rigorous bond selection process. They seek lower credit quality bank loans issued to non-investment-grade companies and aim for debt from issuers that have strong balance sheets and high free cash flow. More than 85% of FFRHX’s bonds are from U.S. companies with the balance from foreign issuers.

FFRHX sports an average effective duration of just a few months. That not only means the fund’s share price won’t move much as interest rates climb or fall. It also means it does not take long—just months—for this fund to be repaid for its bonds’ cost by the bonds’ total cash flows. This limits both credit and duration risk.

In addition, FFRHX’s dividend yield tops its Morningstar bank loan funds category average. Just remember, it could pull back when interest rates drop. The fund has outperformed its category’s average annual return over the past one, three, five and 10 years. Right now, FFRHX is shining.

Debuting in 1977, the Fidelity Capital & Income Fund must be doing something right to have endured for nearly 50 years. For one thing, it is not being overly cautious. Holdings include defaulted securities and debt from companies in troubled or uncertain financial condition. As fund literature states, fa*gIX emphases lower-quality debt securities.

One payoff for the fund and its shareholders has been a stellar performance record. Over the past 10 years, fa*gIX’s average annual return has been the highest among funds on our list that have a track record of at least that length. It has been about a whopping 65% better than its Morningstar high-yield bond fund category. It has been roughly 40% higher over the past 15 years. Such returns have vaulted fa*gIX into the top 1% and 2% of its peer group in those time spans.

fa*gIX’s portfolio is composed of about 70% bond investments with the remaining allocated to U.S. equity, cash, bank debt and other assets. fa*gIX’s stock allocation has likely played a key role in boosting returns. fa*gIX’s relatively low 20% turnover ratio shows the portfolio managers’ conviction in their picks.

American Funds Emerging Markets Bond Fund invests in both government and corporate bonds. EBNEX’s so-called sovereign bonds are mostly from foreign governments. Its fixed income securities can be denominated in either U.S. dollars or local currencies. That offers cash flow, capital appreciation and potential diversification against the risk of concentration in one or a few currencies. The fund’s Morningstar silver ranking indicates EBNEX is expected to outperform over a market cycle of at least five years.

In recent years, the fund has outperformed its peer group on average. Both EBNEX and its peer group have overall credit ratings of BB. EBNEX is well diversified across credit qualities with more than 25% of its bonds having ratings of AAA, AA or A. More than 30% have ratings of BBB. The balance have ratings of BB or below or are unrated.

Income oriented investors will have a tough time beating EBNEX’s dividend yield.

Investors with a stomach for volatility who crave high cash flow should check out the T. Rowe Price Credit Opportunities Fund. PRCPX invests in U.S. and international credit and derivative investments. PRCPX reports that it customarily puts at least 80% of its money to work in corporate holdings and securities rated below investment grade, and that includes up to 50% of its assets in bank loans.

PRCPX’s potential for income and rising share price result mainly from its stakes in below investment grade corporate bonds and floating rate bank loans. A small part of the fund’s bets are on strategic opportunities that it calls “special credit situations.”

PRCPX outperformed its category over the past one, three and five years. Good as its dividend yield has been, PRCPX’s 30-day SEC yield is even higher, suggesting that PRCPX’s dividend yield will rise too. PRCPX’s average effective duration is about three years, suggesting that should interest rates increase 1%, the fund’s value should decline about 3%, and vice versa. PRCPX holds a silver rating from Morningstar.

American Century High Income Fund topped its high yield bond fund category on average over the past one, three and five years. It accomplished this by investing in high yield corporate debt with attractive yields. The fund managers seek companies that can carry their debt loads while delivering strong cash flows that boost their finances. AHIVX aims for businesses that have the resilience to trim debt over time.

AHIVX holds roughly 1,300 securities, mainly bonds. About 80% of AHIVX’s debt holds credit ratings of BB or B. About 12% are rated B or lower. Approximately 4% are rated BBB. The fund’s average effective duration is less than four years. That suggests AHIVX’s share price will remain relatively stable as interest rates shift. Investors seeking strong current yield and capital growth potential should consider AHIVX.

The Northern High Yield Opportunity Fund’s expense ratio is comfortably below its high-yield bond fund category average. Lower management expense ratios often correlate with higher returns. Seeking high yields and capital appreciation, NMHYX invests at least 80% in below investment grade fixed income corporate securities, with credit ratings of BB and below.

Widely diversified, NMHYX invests in about 1,300 holdings, with a turnover of about 68%. The fund invests predominantly in bonds, with a smattering of equities and other holdings.

Actively managed, NMHYX has beaten its category average during the prior one, three, five and 10 years. Conservative-leaning investors will appreciate NMHYX’s lower volatility, especially amid downturns, versus its category average.

Run by three managers, TMAYX holds a broad array of investments, including high yield bonds, bank loans, special situations, structured credit and hedges. This flexibility, along with a commitment to owning assets with attractive relative values, sets the stage for the second highest dividend yield among the funds on our list.

TMAYX achieves that while maintaining a portfolio-wide credit rating of B, equal to its category’s average.

During the previous one, three and five year periods, TMAYX outperformed its category average. TMAYX owns more than 300 securities. Altogether, their average effective duration is roughly three years. TMAYX is a solid option for yield-seeking mutual fund investors.

The T. Rowe Price Intermediate Tax-Free High Yield Fund is the only municipal bond fund on our list. Municipal bond funds often appeal to investors in higher tax brackets seeking federally tax-exempt cash flow. The fund may invest in all credit qualities but leans toward higher yielding issues, including those rated below investment grade. PRIHX is allowed to invest in bonds of any maturity, but its weighted average effective maturity is customarily between three and 10 years. Right now it’s between about seven and eight years.

PRIHX’s average effective duration is a little higher than four years. Should interest rates rise 1% in the next year, PRIHX’s value might fall a little more than 4%. Fortunately, when interest rates begin to decline, PRIHX’s share price stands to rise.

Roughly 30% of PRIHX’s more than 300 issues have credit ratings of AAA, AA or A. The balance of PRIHX holdings are lower rated. PRIHX has an okay dividend yield. Its average annual return over the past five years roughly matches its category average.