A laddered bond strategy is one where you buy individual bonds that have staggered maturities. The simplest way to do it is to buy a bond that matures in each of the next 5 years. As each bond matures, you can reinvest the proceeds in another bond that matures 5 years later, hence keeping this "ladder" in tact. By using a 5-year ladder and buying investment grade, corporate bonds, you can get a blended yield of about 3 to 4 percent, substantially higher than CDs or money market funds. You own the bonds so as long as you hold to maturity and the issuer doesn't go defunct, you don't lose principal and you can reinvest the principal when a bond matures into another bond. Then as rates rise you can constantly be buying into higher yielding bonds.
Municipal bond funds
Municipal bonds are debt securities that are issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenditures. They are exempt from federal tax, and are generally exempt from state taxes for residents of the state in which they are issued. You can get a blended yield of 3 percent tax free or higher buying municipal bond funds that hold hundreds of individual bonds. These funds were beaten down in 2008 and shave yet to fully recover so we feel you are still buying in at a discount. You collect the tax free interest and will likely see a slow appreciation in the value of your shares. For example, some of the national, broad-based municipal bond indices were up 10 percent last year!
Stocks that pay a healthy and growing dividend
Dividends are taxed favorably at 15 percent and can cushion some of the blow when stocks are going down
with the 10-year Treasury rate at about 2 percent, the dividend yield of many blue chip stocks is higher than that. Mind you, you take on a whole number of different risks when investing in stocks versus US Treasuries, so as long as the investor is willing to take on stock risk, he or she can certainly boost the income relative to US Treasuries. A good example is a company like AT&T. You can't get more blue chip than AT&T albeit many might argue that this is a boring stock without much sizzle. The fact is AT&T has about a 6 percent dividend yield. You can buy the stock and the price can do nothing for the next 1 year and you will have collected a 6 percent dividend yield taxed at 15 percent. Not a bad way to boost income.
High yield bonds, formerly known as "junk bonds" are bonds issued by corporations that are not as creditworthy as the blue chip companies and so their weaker financial strength garners them below investment grade ratings. The lower the quality of the company that issues the bond, the higher interest they are forced to pay on their bonds as investors demand this higher interest rate for taking on the higher chance of the company defaulting. It is best to access high yield bonds through diversified funds so that you mitigate the default risk of any 1 company. Low cost ETFs or index funds can get you exposure to literally hundreds of high yield bonds that are paying about 7 percent interest today. Believe it or not, default rates are at historic lows and many times investors are willing to accept higher default risk in some bonds in exchange to substantially higher interest. Historically, adding a high yield bond component to a portfolio has improved the overall performance.
"Alternative" asset classes
Consider alternative asset classes that generate a high amount of income and are not necessarily correlated with stocks and bonds. An example would be Master Limited Partnerships or MLPs. These are companies that essentially are the oil, gas and energy pipelines - they transport the oil and gas and essentially act as the energy toll road. They are highly profitable and pass through these profits in the form of a dividend to the shareholders
.dividends are currently about 5 percent and historically MLPs have outperformed traditional stocks since many of these energy transport companies enjoy monopoly-like pricing power.
Keep in mind that all of the aforementioned ideas come with their own set of unique risks. It's supremely important to diversify your portfolio - and not all strategies may work for you, which is why it's so important to visit with a qualified investment professional to determine what makes the most sense for you and your money. Also, it is important to look at the tax consequences to your investments when boosting your income. Investments taxed as ordinary income will eat away at your earnings much faster than an investment taxed as a capital gain.
Prizm Financial Advisors
1751 South Naperville Road Suite 203