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You might consider assembling your own income portfolio, filling it with everything from savings bonds to bank CDs.
By HELEN HUNTLEY
© St. Petersburg Times, published June 25, 2000
Want income but don't like bond funds? Put together your own bond or CD portfolio as an alternative.
Doing it yourself generally is a good idea only for people who want to hold investments to maturity. Those who sell early may get more or less than they invested, just as they would if they cashed out of a bond fund.
One popular approach to assembling an income portfolio is the ladder, a series of investments with staggered maturities resembling rungs of a ladder. A ladder might consist of certificates of deposit or bonds that mature in one, two, three, four and five years. Each year, as one of the CDs or bonds matures, the proceeds would be used to make a new five-year investment.
Another strategy is the barbell, a portfolio bunched at opposite ends of the yield spectrum: short-term (one- to three-year maturities) and long-term (10- to 20-year maturities).
Both strategies aim for a middle ground -- a higher yield than an all short-term portfolio with less risk than an all long-term portfolio.
One major drawback to doing it yourself is that small investors may have difficulty finding bonds in the specific maturities desired. Another is that trading individual bonds can be expensive. Brokerage firms sell investors bonds from their own inventory, marking up the price of each bond far more for a small transaction than for a big one.
Corporate and municipal bonds also carry the risk of default, so it is important to stick with highly rated issuers and to diversify.
What kind of investments should be in an income portfolio? Here are some options:
Bank CDs. Available from any bank, but for the best rates, check the national high yields list published on page 4 in this section on Sundays or Web sites such as http://www.bankrate.com and http://www.imoneynet.com. Keep deposits within FDIC insurance limits for maximum safety. Very popular for short-term investments.
U.S. Treasury securities. Available directly from the government by signing up for the Treasury Direct program. For information, call the Federal Reserve Bank in Jacksonville at (904) 632-1179 or check http://www.publicdebt.treas.gov on the Internet. Treasury Direct is limited to those securities coming up for auction, but a wider choice of maturities is available through brokerage firms.
U.S. savings bonds. Available through banks or at http://www.savingsbonds.gov online. The current star of this group is the I bond, now yielding 7.49 percent. Rates adjust every six months based on inflation, and income taxes are deferred until the bond is redeemed.
Government agency bonds. Available through brokerage firms. Considered safe, but investors need to be aware of special characteristics. For example, investors who buy mortgage-backed bonds need to understand that their payments may include principal as well as interest as home buyers repay mortgages. This makes record-keeping more complicated and means small amounts of principal have to be reinvested periodically, which may reduce returns.
Municipal and corporate bonds and notes. Usually must be purchased through a brokerage firm, although some issuers sell directly to investors. Investors need to be aware of the provisions under which a bond can be "called," or redeemed, before maturity because the "yield to call" may be quite different from the "yield to maturity." Individual high-yield bonds should be avoided except in the case of sophisticated investors capable of performing credit analysis.
High-yield stocks. Available through brokerage firms. Utilities, real estate investment trusts and preferred stocks offer potential for growth as well as income but carry risks. Because they fluctuate in value, they are less attractive as a fund alternative for investors who want stability of principal.