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"Fixed Income" written on a sheet of notebook paperFixed-income investments can provide a steady stream of income through dividends or interest payments. In the investing landscape, fixed-income is generally considered a less risky asset class since there’s some predictability about what you can earn. You may use fixed-income investments to generate current income or retirement income or as an anchor to windward for your entire portfolio. Understanding all options can help you decide how best to use this type of security. Consider working with a financial advisor before you determine which fixed-income securities to buy.

Fixed Income, Definition

When you’re talking about fixed-income investments, you’re generally talking about investments that pay out dividends or interest over time. The payout or rate of return is fixed, meaning investors can be fairly certain of what they’re likely to earn from the investment.

Compared to other securities, fixed-income tends to be less susceptible to market volatility. But riskier investments may yield higher returns. So investing in fixed income is something of a trade-off because you’re exchanging the possibility of higher returns for a safer investment.

How Fixed-Income Investments Work

Black piggy bankBroadly speaking, fixed-income securities are more or less the same in terms of what they do for investors. That means providing reliable income, either in the form of interest or dividend payments. Interest earned on fixed-income investments is similar to interest earned on a savings account or money market account – it’s typically set at a fixed rather than variable rate. So there may be a specific yield or return that you’re guaranteed to receive on your investment over time. This is how bonds, some of the most popular and well-known fixed-income investments, work.

Then you have dividends. A dividend represents a percentage of a company’s profits paid out to its shareholders. While bonds are associated with interest payments, dividends are more commonly associated with stocks.

Not all stocks pay dividends but those that do can make these payments to shareholders monthly, quarterly or annually. Dividend payments are not necessarily set in stone – they can increase or decrease as a company’s profits increase or decrease. But if you’re investing in Dividend Aristocrats or Dividend Kings, you can generally count on receiving regular dividend payments that increase over time.

The advantage of dividends is that you can use them for current income or reinvest them into additional shares of dividend stock. If you don’t need the fixed income that a dividend stock is providing now, you can use it to buy additional shares and expand your portfolio without having to pony up additional cash out of your pocket.

Types of Fixed-Income Investments

As mentioned, there’s more than one way to invest in fixed income. And you may decide that just one works best for you or that a combination of several options is better. Here’s an overview of some of the most popular ways to invest in fixed income.

Treasury Investments

Government-backed Treasury securities are some of the safest ways to invest for fixed income. There’s virtually zero risk of losing money with these investments, regardless of whether you’re investing for the short or long term.

There are several ways to invest with Treasury securities, including:

  • Treasury bills. Treasury bills or T-bills are a type of short-term fixed-income investment that has a maturity term of one year. When you buy a T-bill, you purchase it at a price below face value then earn the difference between that price and face value once the bill matures.
  • Treasury bonds. Treasury bonds are designed for longer-term investments, as they have maturity dates of 20 or 30 years. These bonds earn a fixed interest rate, with interest paid semiannually and the full principal returned at maturity.
  • Treasury notes. Treasury notes work much the same as Treasury bonds. The difference is in how they mature. With T-notes, the maturity term can range from two to 10 years so these could be useful as a mid-term investment.
  • Treasury Inflation-Protected Securities (TIPS). TIPS are a type of government bond that adjusts with rising or falling rates of inflation. So if inflation increases, for example, the rate of return adjusts to keep pace so you don’t lose any purchasing power.


Bonds pay interest to investors according to a set schedule. They can return your money – including principal and interest earned – to you at a predetermined maturity date. Bonds can be issued by different entities which can influence the rate of return they offer.

  • Municipal bonds. Municipal or muni bonds are issued by state and local government authorities. The interest you earn on municipal bonds is generally exempt from federal taxes and states can also cut investors a tax break as well.
  • Corporate bonds. Corporate bonds can be used by companies to raise capital. These bonds can pay back fixed income to investors in the form of interest, though compared to municipal bonds or government-backed bonds, they’re a little riskier.
  • Government bonds. As mentioned, the federal government can offer Treasury bonds to investors. While these are arguably the safest bond option for fixed income, it’s important to keep the longer maturity period in mind.
  • High yield/junk bonds. High yield or junk bonds can offer some of the highest returns to fixed-income investors but they can also offer the greatest degree of risk compared to other bond investments.

Fixed-Income Funds and ETFs

Aside from purchasing individual bonds, you can also take advantage of fixed income through bond funds or bond ETFs. Owning a bond mutual fund or exchange-traded fund allows you to hold several different types of bonds in one place. This can allow for greater liquidity but it’s important to keep bond fund and bond ETF expense ratios in mind.

When choosing bond funds or ETFs, it’s important to consider the fund’s performance and cost. The expense ratio you pay can determine how much of your returns you get to keep. The lower the expense ratio, the better. And keep in mind that past performance is not an absolute predictor of how well any fund will do in the future.

Preferred Stock

If you’re interested in dividends as part of your fixed-income investment plan then you may consider preferred stock. Preferred stocks are required to pay dividends or interest out to preferred shareholders before they’re paid to common shareholders. Compared to common stock shares, preferred stocks can offer higher and more consistent dividends to investors.

Banking Products for Fixed Income

Aside from fixed-income investments, there are other ways to generate steady income from your money. Banks and credit unions can offer the following options for earning income with minimal risk:

  • Certificates of deposit. Certificates of deposit or CDs are time deposits, meaning you agree to keep your money in the account for a set time period. In return, you earn interest on the money you deposit. CDs can pay higher interest rates than regular savings accounts but they lack liquidity since a penalty may apply for withdrawing money early.
  • IRA CDs. IRA CDs combine the features of a CD with the tax treatment of an Individual Retirement Account. Contribution limits and withdrawal rules for IRA CDs are the same as regular IRAs. The difference is that an IRA CD carries less risk since you’re not investing in the market.
  • Money market accounts. Money market accounts are similar to high yield savings accounts, in that they can earn a higher rate of interest compared to regular savings accounts. The difference is that money market accounts can offer additional features, such as check-writing or debit card access, making them similar to a checking account as well.

How to Make Fixed-Income Investments

If you’re interested in fixed income, the type of investments you choose can determine how you add them to your portfolio.

For example, if you’re interested in any type of Treasury security you’d need to purchase them through Treasury Direct. If you want to open CD or money market accounts, you could go to your bank or credit union for that. But if you want to give fixed-income funds or ETFs or preferred stock a try, an online brokerage could help with that.

Online brokerage accounts make it easy to invest in bond funds, bond ETFs and dividend stocks. Depending on the brokerage there may be a low minimum to invest and you may pay $0 to trade U.S. ETFs and stocks. When comparing brokerage accounts online be sure to check the range of investment options available, the minimum required to invest and what you’ll pay in commissions to trade.

The Bottom Line

"FIXED RATE"Fixed-income investments, which come in a myriad of forms, can help complement other securities in your investment portfolio and make it more well-rounded, less vulnerable to market volatility and more valuable, too. If you’re nearing retirement or simply trying to plan ahead, consider which type of fixed-income securities may be best suited for reaching your goals. Don’t forget to consider hybrid securities, like convertible bonds, which have a fixed-income component and an equity component.

Tips for Investing

  • Like other investments, fixed income is subject to taxes on earnings. The way individual investments are taxed can depend on the type of investment. Again, for example, municipal bonds are generally tax-exempt. But corporate bonds are taxed on the interest and on capital gains. Talking over fixed-income taxation with a financial advisor or tax professional can help you decide which type of investments work best within your current tax strategy.
  • If you’re not investing for fixed income yet, work with a financial advisor to better leverage these investments in your portfolio. If you don’t have a financial advisor yet, SmartAsset’s financial advisor matching tool makes finding one in your local area easy. You only have to answer a few simple questions to get your personalized advisor recommendations online. If you’re ready, get started now.

Photo credit: © Faizal Bin Ramli, © Lollipop, ©

Rebecca Lake, CEPF® Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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