It used to be easy to earn generous income safely from your investments: Buy Treasury bonds or certificates of deposit and watch the cash roll in. But with yields on low-risk investments scraping rock-bottom and higher interest rates nowhere in sight, retirees and other income-oriented investors must grapple with an unsettling question: Should you play it safe and accept microscopic yields or take calculated risks to get more? “In this environment you have to take on more risk to get any given amount of yield,” says Jay Wong, comanager of Payden Equity Income Fund.
SEE ALSO: 12 Stocks to Get Dividends Every Month
In other words, land mines abound. If rates start to rise quickly, some income investments will get pummeled. If they don’t rise at all—possibly a sign of a weak economy—other investments could suffer. Plus, little is cheap today. Says Andy McCormick, head of T. Rowe Price’s taxable U.S. bond team: “You go through cycles when it’s appropriate to play offense. Other times, you play defense. This is a moment when you have to play both sides of the ball.”
This treacherous environment demands that you understand your alternatives and know what could go wrong. Here are some of the best options for income seekers, listed roughly in order of yield and risk. Prices and yields are as of March 31.
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- 2-3% Municipal bonds
- 2-3% Investment-grade corporate bonds
- 3-4% Floating-rate loans
- 2-5% Bank accounts
- 5-7% Preferred Stocks
- 2-8% Dividend stars
- 4-8% Energy MLPs
- 7-12% Closed-end funds
- 7-14% Mortgage REITs
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