What is fixed-income investing? 5 types of investments that can protect your wealth and generate income (2024)

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  • Fixed-income investing involves assets that generate a stable returns, usually with set interest payments or dividends.
  • The most common types include bonds, annuities, and certificates of deposit.
  • Though relatively safe, fixed-income assets are subject to inflation risk and don't offer much capital appreciation.

What is fixed-income investing? 5 types of investments that can protect your wealth and generate income (1)


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What is fixed-income investing? 5 types of investments that can protect your wealth and generate income (3)


With a conservative investment strategy, the name of the game is to preserve a portfolio's wealth and generate income through low-risk assets. The aim is to provide a steady cash stream, like a regular paycheck.

People nearing the end of their careers who are looking to cash in, rather than grow their portfolios, often favor this approach and lean more heavily toward fixed-income investing strategies. It's one the safest ways to invest, moving away from the volatile highs and lows of the equity market in favor of other assets, usually government or corporate bonds.

What is fixed-income investing?

Fixed-income investments are those that provide a regular and often predetermined payout, generally in the form of interest or dividend payments. They are fixed in the sense that they don't fluctuate, either in the amount or the timing of their payments.


Income investing — and fixed-income investing in particular — is the opposite of growth investing. Assets that generate steady money tend not to be the type that will appreciate much in value. On the other hand, they (usually) won't go down. They offer financial security, especially if you hold onto them.

It's like the difference between placing a standing order to buy a dozen roses each year and planting a rose bush. With the former, you know that you're getting 12 roses — no more, but no less. With the latter, you may get many dozens of roses, but a harsh winter could kill your plant, leaving you with no blooms at all.

Types of fixed-income investments

There are several types of fixed-income investments. Their payouts vary, but the rates all tend to be higher than those of the average savings account. Here are the most common:

1. Bonds

When people think of fixed-income investments, bonds are usually the first thing that comes to mind. Government bonds, like US Treasuries, are the most common. Other types include corporate bonds and municipal bonds.


In most cases, you can think of these investments like loans: The borrower is the bond's issuer, and the investor, rather than a financial institution, is the lender. A bond has a set lifespan; when it eventually matures, the investor gets back what they initially paid along with added interest along the way.

With short-term bonds, that could happen in one to four years. With long-term bonds, it could take as long as 10 to 30 years. Treasury bills can even mature in less than a year.

Let's say you purchase a fixed-rate T-bond for $1,000 with an interest rate of 1.25%. If the bond matures in 30 years, you will receive $12.50 every year (or more realistically, $6.25 every six months because T-bonds have semiannual coupon payments). Overall, you can expect to make $375 on top of your initial investment.

Of course, not all bonds make it to maturity. For example, if a company that has issued corporate bonds goes bankrupt, a lender may not get back their entire initial investment.


This has never happened with US Treasuries, which is why they're considered virtually risk-free. Also relatively safe: highly rated, or investment-grade, corporate bonds — usually issued by large, stable corporations.

When it comes to risk, the issuer's creditworthiness is important. But so is the bond's lifespan —that is, how long it takes to mature.

Overall, long-term bonds — particularly corporate long-term bonds — provide the highest returns, but are also considered the riskiest. This is because they're most vulnerable to interest rate hikes, which can lessen the value of the bond if an investor is trying to sell it before it reaches maturity. There's also a lot more time for a corporation to steer off financial track and default on payments, including the eventual return of your initial investment.

Short-term bonds, on the other hand, are less vulnerable to interest rate swings, and much easier to hold until maturity. But they provide the smallest returns.


2. Bond ETFs and bond mutual funds

Rather than purchasing individual bonds, you can invest in a bond exchange-traded fund (ETF) or bond mutual fund. In either case, you're buying into a portfolio of bonds. This type of diversification leads to a more stable investment, and oftentimes, you'll see bond mutual funds tied into 401(k) retirement plans.

Bond ETFs and mutual funds have a number of different strategies. Some of them mix portfolios of long- and short-term bonds. Others mix low-risk US Treasuries with high- risk but high-yield corporate bonds, known as junk bonds.

Like buying a single bond, the average ETF or bond fund pays regular — sometimes even monthly — income. Bond mutual funds' payout is more likely to vary since their portfolios change more frequently.

3. Fixed annuities

An annuity is a sort of contract with an insurance company. It calls for the company to pay the same sum at regular intervals for a set period of time. Since it functions sort of like a salary, annuities are very popular among people who have retired or are nearing retirement.


When buying an annuity, investors will generally invest a lump sum with the insurer. This money is repaid to them, with interest, over time. Their habitual payments typically end with their death or the death of a beneficiary (i.e. spouse), depending on the annuity policy.

The major risk is that if an investor dies before collecting the full amount of their annuity investment, that leftover money may be passed onto the company that sold it to them rather than their surviving family.

4. Certificates of deposit

Like bonds, certificates of deposit (CDs) offered by banks and credit unions are a slightly better-paying alternative to the average savings account. And they work in a similar way.

You buy a CD by depositing a lump sum in an account at the financial institution. In layman's terms, you're giving them a loan. The CD earns interest for a set period of time — between six months and 10 years, depending on the CD. When the time's up, you'll get back your initial deposit.


5. Preferred stocks

Most forms of fixed-income investing don't give you equity, or ownership, in anything. Even corporate bonds function merely as a loan to the company.

But preferred stock is sort of the best of both worlds — possessing the prime features of both bonds and stock shares.

A company's preferred shares provide regular dividends, which come from its profits, that are paid out in a fixed amount every quarter — like bond interest. The payments don't typically fluctuate the same way a common share dividend does. They also usually larger.

But since preferred shares are stocks, they do trade on the market, and they can appreciate in price — especially if the company does well. However, they usually don't grow as much as common shares do.


Preferred stock is riskier than other fixed-income vehicles because it's tied to a company's success. If a company runs into serious financial trouble, it might have to suspend dividend payments — though preferred shareholders still get paid before common shareholders.

There's also the risk that the company could force a buyback of its preferred shares, or convert them to common shares.

Benefits of fixed-income investing

Fixed-income investments are particularly secure because:

  1. They provide steady interest throughout the investment's lifetime.
  2. You've got a locked-in interest rate.
  3. Your principal is backed or guaranteed by the US government (T-bonds) or the FDIC (CDs).
  4. Unlike stockholders, fixed-income investors can become creditors during a bankruptcy, meaning all or a portion of their initial investment may be returned.
  5. Bonds are given grades by credit rating agencies, signifying their issuers' ability to repay, so investors can understand their risk before they buy.


Risks of fixed-income investing

Though risk is limited with fixed-income investments, it still exists. Risks include:

  1. Credit risk: an issuer defaulting on interest payments or paying back the principal at maturity.
  2. Inflation risk:If prices rise, it'll eat into the value of your fixed payments. Your initial investment may not have as much buying power when it is returned, either.
  3. Interest rate risk: You'll miss out on higher returns if interest rates rise and you're locked into a lower fixed rate.

The bottom line on fixed-income investing

Along with mature investors requiring steady income, fixed-income investments are a great place to start for beginning investors. They don't always require the same intimate market knowledge as equities and they're much less volatile.

For the same reason, they don't offer the highest returns — and not much capital appreciation in the long term. But they can serve as a better alternative to a traditional savings account.


Overall, a good portfolio diversification strategy will include some sort of fixed-interest investments, too.

Mariel Loveland

I'm an experienced financial professional with a deep understanding of fixed-income investing. I've spent years navigating the intricacies of financial markets and have successfully helped individuals make informed decisions about their investment strategies.

Now, let's delve into the concepts presented in the article you provided:

1. Fixed-Income Investing Overview: Fixed-income investing is a strategy aimed at preserving wealth and generating income through low-risk assets. This approach is particularly favored by individuals nearing the end of their careers, looking for a stable cash stream instead of capital appreciation.

2. Definition of Fixed-Income Investments: Fixed-income investments provide regular and predetermined payouts, usually in the form of interest or dividend payments. They are characterized by their stability in both amount and timing of payments. This contrasts with growth investing, where assets aim for capital appreciation.

3. Types of Fixed-Income Investments: a. Bonds: These are loans to the bond issuer, with a set lifespan and regular interest payments. Government bonds, like US Treasuries, are common, offering varying maturities and risk levels.

b. Bond ETFs and Mutual Funds: Investment in a portfolio of bonds through exchange-traded funds (ETFs) or mutual funds, providing diversification and regular income.

c. Fixed Annuities: Contracts with insurance companies involving regular payments over a set period, often popular among retirees.

d. Certificates of Deposit (CDs): Similar to bonds, CDs are time deposits with higher interest rates than savings accounts.

e. Preferred Stocks: Combining features of bonds and stocks, preferred stocks offer regular dividends and potential appreciation.

4. Benefits of Fixed-Income Investing:

  • Steady interest throughout the investment's lifetime.
  • Locked-in interest rates.
  • Principal backed or guaranteed by the US government or FDIC.
  • Priority as creditors during bankruptcy.
  • Graded by credit rating agencies for risk assessment.

5. Risks of Fixed-Income Investing:

  • Credit risk (issuer defaulting).
  • Inflation risk (reduced buying power due to rising prices).
  • Interest rate risk (missing higher returns in a rising interest rate environment).

6. Conclusion: Fixed-income investments are secure, especially for mature investors seeking steady income. While they may not offer the highest returns or significant capital appreciation, they provide a less volatile alternative to traditional savings accounts. A well-rounded portfolio often includes some fixed-interest investments for diversification.

For any personalized advice or specific questions about fixed-income investing, feel free to ask.

What is fixed-income investing? 5 types of investments that can protect your wealth and generate income (2024)


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