Income-focused investing is an investment strategy that involves putting together a portfolio of dividend-paying stocks and high-quality bonds.
You’ll earn a dependable source of income through your investments without putting in much work, if you put your portfolio together with the right stocks and bonds.
What are bonds?
You (the lender) loan money to a borrower (the issuer) with an agreement that the issuer make fixed interest payments to you until the bond’s maturity date. The maturity date is the due date of the loan principal, which the issuer must pay back in full.
In essence, this type of loan investment generates income for investors through fixed periodic interest payments and the return of investment principal.
Issuers are corporate or governmental organizations that rely on funds from bonds to pay for their operations and projects. There are three basic types of bonds (U.S. Treasury bonds, municipal bonds, and corporate bonds) as well as bond funds.
Bonds have their own advantages and disadvantages, depending on what type of investor you are and what your risk tolerance is. So, for this article, we’re going to assume you’re a new investor and you are looking for the safest bonds to protect your investment.
Bonds you need
US Treasury bills, notes, and bonds
Treasury bills, notes, and bonds are government-backed debt securities that guarantee no loss of principal — your money won’t lose value. Therefore, these are among the safest investments out there.
Treasury bills are short-term bonds with maturity periods lasting from only a few days to 52 weeks. You buy them at a discount from their face value, but you’ll make their face value at maturity. If you make more from them at maturity, you’ll have received interest.
Because their maturity periods are shorter than those of notes and bonds, Treasury bills offer lower yields. This is offset, however, by the fact that they offer next to no risk. Short maturity periods usually aren’t subject to changes in interest rates, and the chances are almost zero that the U.S. government will default any time soon.
Treasury notes and bonds have the same low-risk advantages that Treasury bills have, but offer higher yields. Treasury notes have fixed interest rates and maturity periods of one to 10 years. Treasury bonds have fixed 30-year maturity periods and require a minimum investment of $100.
In addition, Treasury bonds have tax exemptions; the interest you receive every six months isn’t subject to state or local income tax.
High-rated bonds
Before you invest in bonds, you need to know the financial condition of the organizations issuing them — you don’t want to invest in bonds from organizations about to default. Debt securities and their issuers carry credit ratings; any security with a high credit rating usually means its issuer won’t default, offering you some degree of investment protection.
Bonds you should avoid
High-yield corporate bonds
These “junk bonds” are attractive to high-risk investors. They pay a lot more than high-rated and government-issued securities, but that’s because their issuers have low credit ratings; they have to pay you more to get you to invest.
If you’re a new investor and concerned about protecting your principal, don’t go for these.
Foreign bonds
These are securities issued by foreign entities in domestic currency. They are attractive investments due to their high yields, which foreign entities have to pay you to offset the risk of currency fluctuations.
In other words, despite receiving higher yields, you can lose money, and lots of it, whenever the issuer’s currency loses value against the U.S. dollar.
The bottom line
There are hundreds of bonds and bond funds out there in which you can invest. You can now take this information about bond basics and find the right ones for you.
