fixed income Archives

What is Fixed Income?

We often associate fixed income with pensions and retirees, but what does it mean in the world of investing? Let’s find out.

If we’ve learned anything since the turn of the century, it’s that even though the stock market goes up over time, there can be some pretty jarring periods where it seems like every stock you own is about to go bankrupt. Needless to say, that’s not much fun for an investor, and if you’re close to or already in retirement, it can be disastrous. That’s why most investing strategies suggest a few safe, fixed-income investments.

Fixed-income investments come in the form of bonds and preferred stocks.

Despite its name, a preferred stock doesn’t represent or confer ownership—it’s debt, like a bond or loan. Also like bonds, preferreds have fixed distribution rates. So you’d only buy a preferred for steady fixed income, not capital gains.

That said, preferred stock can generate yields that are usually between 4% and 8%. And preferred shareholders are usually better protected—both in and out of bankruptcy—than common stock holders.

Bonds have historically been recommended for investors who want to preserve their capital above all else. However, the low interest rates that have prevailed since the 2008 financial crisis have driven yields down across the board so that many bonds now yield barely enough to keep up with inflation.

In general, the safer and shorter-duration a bond, the less it yields. Today, the safest treasury bonds aren’t even yielding enough to cover inflation. Many investors and institutions are responding by taking on greater risk, buying lower-quality bonds in search of decent yields. You should be cautious about this strategy; it can get you in a lot of trouble.

Strong stocks will always be worth investing in. To learn more, and to start investing yourself, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics. 

 

Read More