14 Ways to Invest for Income Without Stocks

CDs and Short-Term Bonds

• Yield: 0.4% (average for two-year CDs)
• GE Capital Bank pays 1.1% for a one-year CD with a $500 minimum. A two-year CD at Melrose Credit Union ($5,000 minimum) earns 1.4%. With short-term rates likely to rise in the next 12 months or so, you’re better off choosing the one-year maturity, even though it yields slightly less than the two-year deposit. Vanguard Short-Term Investment-Grade (VFSTX, 1.5% yield), a member of the Kiplinger 25, pays a bit more, but you might lose a bit of principal if rates rise. (Bond prices and interest rates tend to move in opposite directions.)

Certificates of deposit may not pay much interest, but you won’t lose money with them, either. That makes them good choices to stash cash that you will need within a year to 18 months.

Municipal Bonds

• Yield: 1.9% (intermediate-maturity bonds)

If you’re in a high tax bracket, municipal bonds, which pay interest that is generally free from federal income tax (and often state and local income taxes), can be more lucrative than taxable bonds of similar credit quality and maturity.

For instance, a ten-year, triple-A-rated muni bond typically yields about 2.3%. For someone in the highest federal tax bracket, that is the equivalent of 4.1% from a taxable bond. Even if you’re in the lower, 28% federal bracket, your taxable-equivalent yield would be 3.2%, which beats the taxable 2.7% yield of ten-year Treasuries and the 3.1% yield of comparable corporate IOUs.

Our favorite tax-free bond fund, Fidelity Intermediate Municipal Income (FLTMX), invests mostly in high-quality bonds; more than half of the fund’s assets are invested in bonds of triple- or double-A quality with maturities of five years or more. The fund, a member of the Kiplinger 25, yields 1.9%, which is a taxable-equivalent yield of 3.4% for those in the highest income tax bracket.

We also like USAA Tax Exempt Intermediate-Term Fund (USATX). Its 2.3% yield works out to a 4.1% taxable-equivalent yield for top-bracket investors. The fund’s managers goose the yield a little by focusing on the lower rung of investment-grade bonds.

Intermediate-Term Bonds

• Yield: 2.4% (investment-grade index)
• Fidelity Total Bond (FTBFX, 2.8%), another Kip 25 fund, holds mostly a mix of high-grade corporate bonds, government bonds and mortgage securities. At last word, it also had 14% of its assets in junk bonds.

The longer a bond’s maturity, the more it usually yields, but the more vulnerable it is to higher rates.

The best trade-off between risk and yield is in the middle of the maturity spectrum. The typical taxable, intermediate-term bond fund yields 2.1%. But you’ll get more with Vanguard Intermediate-Term Corporate Bond ETF (VCIT, 3.3%), an exchange-traded fund. It holds mostly investment-grade debt in bonds of five- to ten-year maturities, but half of the fund is invested in the lower end of the investment-grade spectrum (debt rated triple-B). The fund’s annual fee of 0.12% scrapes near the bottom.

Floating-Rate Loans

• Yield: 3.4% (average for bank-loan funds)

Rising interest rates are bad news for most bonds, but not this kind of security: The rates on these loans, which banks typically make to companies with below-investment-grade credit ratings, move in step with the market.

That’s because they are tied to a short-term benchmark and reset every 30 to 90 days. Because the borrowers have above-average credit risk, we like funds that tilt toward better-quality or widely traded loans. Fidelity Floating Rate High Income (FFRHX, 2.6%) has an average credit quality of double-B, better than the single-B average quality for the category.

PowerShares Senior Loan Portfolio (BKLN, 4.2%), an ETF, tracks an index of the 100 largest and most widely traded bank loans.

High-Yield Bonds

• Yield: 5.2% (average for junk bonds)

Debt rated double-B or lower, or junk bonds, can be risky.

But default rates, arguably the biggest risk with high-yield debt, are at 20-year lows and likely to stay low as the U.S. economy improves. And that’s a boon to junk bond funds. USAA High Income (USHYX, 4.7%) has consistently turned in above-average returns without taking on undue risk. Over the past decade, it has been less volatile than its peer group. About 70% of the fund’s assets recently sat in bonds rated double-B or single-B (par for the category), but it also had about 15% in investment-grade debt.

For a bit more yield, reach no further than SPDR Barclays High Yield Bond (JNK, 4.9%), an ETF that tracks an index of widely traded junk bonds and charges an annual fee of just 0.4%.

Emerging-Markets Debt

• Yield: 5.8% (emerging-markets bond index)
• PowerShares Emerging Markets Sovereign Debt Portfolio (PCY, 5.1%) has several things working in its favor. It focuses on dollar-denominated debt, a more stable way to invest in these securities, and its 0.50% annual expense ratio is below-average for its peer group. We like, too, that its portfolio is spread roughly evenly among 23 countries, with each accounting for 4% to 5% of the fund’s assets.

With slower growth in China, political turmoil in Brazil and Turkey, and Russia’s annexation of part of Ukraine, it’s no wonder that emerging-markets securities performed poorly last year. But things are looking brighter: In the first quarter of 2014, emerging-markets bonds returned 2.9%, beating the U.S. bond market by a full percentage point. And their yields are hard to beat.

Our favorite emerging-markets debt fund is Fidelity New Markets Income (FNMIX, 5.4%), a member of the Kiplinger 25. Longtime manager John Carlson focuses on dollar-denominated debt, a more stable way to invest in these securities because foreign currencies tend to be volatile. Over the past decade, New Markets Income returned 9.2% annualized, beating its typical peer by an average of 1.2 percentage points a year.

Preferred Shares

• Yield: 6.7% (average of preferred stocks)

These hybrid investments behave more like bonds than stocks. Befitting securities with extra-high yields, preferreds carry above-average risks. First, most are issued by financial firms, so funds that focus on preferred stocks tend to be heavily invested in that sector. And because preferreds pay fixed dividends, they tend to lose value when interest rates rise. In 2013, just the possibility of a rise in rates sent preferreds tumbling. But the selloff enhanced the group’s appeal. As share prices fell, yields rose.

The best way to invest in this sector is through an ETF. PowerShares Preferred (PGX, 6.4%) has the top three-year return of all preferred-stock ETFs: 6.6% annualized. It charges 0.50% in annual fees.

More from Kiplinger

• Bond Portfolios for More Income, Less RiskThink Outside the Bank to Boost YieldThe Perils of Chasing High Yields5 Stocks Yielding 5% Or MoreA Preference for Preferred Stocks