Here are 14 ideas for generating income in seven broad
categories--and none involves any common stocks. As always with
investment decisions, consider your overall allocation, how long
you plan to invest and your tolerance for risk before you make a
We've listed them in order of yield from lowest to
Yield: 0.4% (average for two-year CDs)
Certificates of deposit may not pay much interest, but you
won't lose money with them, either. That makes them good choices
to stash cash that you will need within a year to 18 months.
GE Capital Bank pays 1.1% for a one-year CD with a $500
minimum. A two-year CD at Melrose Credit Union ($5,000 minimum)
earns 1.4%. With short-term rates likely to rise in the next 12
months or so, you're better off choosing the one-year maturity,
even though it yields slightly less than the two-year deposit.
Vanguard Short-Term Investment-Grade (
, 1.5% yield),
a member of the Kiplinger 25
, pays a bit more, but you might lose a bit of principal if rates
rise. (Bond prices and interest rates tend to move in opposite
Yield: 1.9% (intermediate-maturity bonds)
If you're in a high tax bracket, municipal bonds, which pay
interest that is generally free from federal income tax (and
often state and local income taxes), can be more lucrative than
taxable bonds of similar credit quality and maturity.
For instance, a ten-year, triple-A-rated muni bond typically
yields about 2.3%. For someone in the highest federal tax
bracket, that is the equivalent of 4.1% from a taxable bond. Even
if you're in the lower, 28% federal bracket, your
taxable-equivalent yield would be 3.2%, which beats the taxable
2.7% yield of ten-year Treasuries and the 3.1% yield of
comparable corporate IOUs.
Our favorite tax-free bond fund, Fidelity Intermediate
Municipal Income (
), invests mostly in high-quality bonds; more than half of the
fund's assets are invested in bonds of triple- or double-A
quality with maturities of five years or more. The fund,
a member of the Kiplinger 25
, yields 1.9%, which is a taxable-equivalent yield of 3.4% for
those in the highest income tax bracket.
We also like USAA Tax Exempt Intermediate-Term Fund (
). Its 2.3% yield works out to a 4.1% taxable-equivalent yield
for top-bracket investors.
The fund's managers goose the yield a little by
focusing on the lower rung of investment-grade bonds
Yield: 2.4% (investment-grade index)
The longer a bond's maturity, the more it usually yields, but
the more vulnerable it is to higher rates.
The best trade-off between risk and yield is in the middle of
the maturity spectrum. The typical taxable, intermediate-term
bond fund yields 2.1%. But you'll get more with Vanguard
Intermediate-Term Corporate Bond ETF (
, 3.3%), an exchange-traded fund. It holds mostly
investment-grade debt in bonds of five- to ten-year maturities,
but half of the fund is invested in the lower end of the
investment-grade spectrum (debt rated triple-B). The fund's
annual fee of 0.12% scrapes near the bottom.
Fidelity Total Bond (
, 2.8%), another
fund, holds mostly a mix of high-grade corporate bonds,
government bonds and mortgage securities. At last word, it also
had 14% of its assets in junk bonds.
Yield: 3.4% (average for bank-loan funds)
Rising interest rates are bad news for most bonds, but not this
kind of security: The rates on these loans, which banks typically
make to companies with below-investment-grade credit ratings, move
in step with the market.
That's because they are tied to a short-term benchmark and reset
every 30 to 90 days. Because the borrowers have above-average
credit risk, we like funds that tilt toward better-quality or
widely traded loans. Fidelity Floating Rate High Income (
, 2.6%) has an average credit quality of double-B, better than the
single-B average quality for the category.
PowerShares Senior Loan Portfolio (
, 4.2%), an ETF, tracks an index of the 100 largest and most widely
traded bank loans.
Yield: 5.2% (average for junk bonds)
Debt rated double-B or lower, or junk bonds, can be risky.
But default rates, arguably the biggest risk with high-yield
debt, are at 20-year lows and likely to stay low as the U.S.
economy improves. And that's a boon to junk bond funds. USAA High
, 4.7%) has consistently turned in above-average returns without
taking on undue risk. Over the past decade, it has been less
volatile than its peer group. About 70% of the fund's assets
recently sat in bonds rated double-B or single-B (par for the
category), but it also had about 15% in investment-grade
For a bit more yield, reach no further than SPDR Barclays High
Yield Bond (
, 4.9%), an ETF that tracks an index of widely traded junk bonds
and charges an annual fee of just 0.4%.
Yield: 5.8% (emerging-markets bond index)
With slower growth in China, political turmoil in Brazil and
Turkey, and Russia's annexation of part of Ukraine, it's no
wonder that emerging-markets securities performed poorly last
year. But things are looking brighter: In the first quarter of
2014, emerging-markets bonds returned 2.9%, beating the U.S. bond
market by a full percentage point. And their yields are hard to
Our favorite emerging-markets debt fund is Fidelity New
Markets Income (
a member of the Kiplinger 25
. Longtime manager John Carlson focuses on dollar-denominated
debt, a more stable way to invest in these securities because
foreign currencies tend to be volatile. Over the past decade, New
Markets Income returned 9.2% annualized, beating its typical peer
by an average of 1.2 percentage points a year.
PowerShares Emerging Markets Sovereign Debt Portfolio (
, 5.1%) has several things working in its favor. It focuses on
dollar-denominated debt, a more stable way to invest in these
securities, and its 0.50% annual expense ratio is below-average
for its peer group. We like, too, that its portfolio is spread
roughly evenly among 23 countries, with each accounting for 4% to
5% of the fund's assets.
Yield: 6.7% (average of preferred stocks)
These hybrid investments behave more like bonds than stocks.
Befitting securities with extra-high yields, preferreds carry
above-average risks. First, most are issued by financial firms,
so funds that focus on preferred stocks tend to be heavily
invested in that sector. And because preferreds pay fixed
dividends, they tend to lose value when interest rates rise. In
2013, just the possibility of a rise in rates sent preferreds
tumbling. But the selloff enhanced the group's appeal. As share
prices fell, yields rose.
The best way to invest in this sector is through an ETF.
PowerShares Preferred (
, 6.4%) has the top three-year return of all preferred-stock
ETFs: 6.6% annualized. It charges 0.50% in annual fees.
Bond Portfolios for More Income, Less Risk
Think Outside the Bank to Boost Yield
Perils of Chasing High Yields
5 Stocks Yielding 5% Or More
A Preference for Preferred Stocks