Many investors seek a reliable stream of income, especially as they near retirement age. There are many different types of investments that can provide fixed income, and in this brief introduction I will highlight a few of my favorites. I’m specifically focusing on highly liquid investments that are easy to understand and buy or sell, and avoiding more specialized income investments such as real estate rental property.
Bond investments can provide a very predictable source of income, because they pay interest on a regular basis. If you buy individual bonds, the coupons may pay every 6 months or once a year. But you can also own a diversified portfolio of bonds through mutual fund or ETF investments, many of which make monthly dividend payments. Investment rates have recently been relatively low, so you may want to take a look at owning at least some high yield bonds in your portfolio. While these are more volatile than higher grade bonds, the difference in the interest rate they pay is currently as much as 7 or 8 percent per year. If you are concerned about inflation, there is a type of bond that protects you against this also: Treasury Inflation Protected Securities, better known as TIPS. These pay an interest rate that adjusts to some percentage above the current rate of inflation.
Dividend paying stocks can also provide good income and the key consideration in this type of investment is to find relatively high quality and stable stocks that still offer decent yields. As stock market valuations rise, this becomes more difficult to do, but it is certainly possible. Stocks of solid companies that currently offer a 4 to 6 percent dividend yield include: AT&T, Lockheed Martin, and Seagate Technology. Even technology stalwarts like Intel Corporation and Microsoft, which in the past were not known for paying dividends, are now yielding over 3 percent. You can also look into Real Estate Investment Trusts (also known as REITs) as a source of dividend income. REITs are also stocks, but they are legally structured in such a way that the company has to pay out a majority of its profits as dividends to the shareholders (in return for some corporate tax breaks from the IRS). REITs typically invest in commercial or residential real estate buildings, so you can think of them as landlords: companies that own a portfolio of malls, office buildings, or apartment complexes.
Of course every asset class has its good and bad periods, so if you are concerned about losses and require a steady stream of income, you should consider a tactical asset allocation strategy that invests in bonds.
Investing in Bonds 