How to Buy Bonds Now

The Wall Street Journal recently ran a page-one story with the headline “Retirees Get Squeezed by Low Rates.” To which my reaction was, “Well, duh.”

Retirees (and other savers) have been squeezed by low rates for the better part of a decade, as Kiplinger’s readers are very well aware. Income-starved investors have poured money into dividend-paying stocks. Around the office, we joke that dividends is the magic word; we can’t write enough about them. And each year, we go beyond dividends with our “yieldfest”—our top choices among bonds and other income-oriented investments.

This year, it’s a good news/bad news story. Interest rates are finally on the rise—that’s the good news. But given the perverse nature of the bond market, that means the value of existing bonds (with lower interest rates) is headed downward. As associate editor Daren Fonda writes, you can minimize the pain if you hold short-term debt: "Those prices shouldn’t fall much if rates rise modestly, and you can re­invest cash proceeds from bonds maturing in a year or two."

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All told, we offer 29 income ideas—from tax-free municipal bonds that yield 4% or less to mortgage REITs that yield as much as 8% to 11%. But before you pull that tantalizing trigger, remember another ironclad rule of the bond market: Higher yields come with higher risks. So don’t stick your neck out farther than you have to. “Decide how much income you need—rather than how much you’d like to make—and tailor your portfolio to those needs,” says Daren. Even in today’s changing market, he says, you can comfortably earn 3% or 4% without taking undue risk.