There are two types of return on investment: price appreciation and income. Investing for price appreciation requires taking on a certain amount of risk. Trading stock for profit involves market risk, credit risk and liquidity risk. Income securities, however, present less risk. Bonds and preferred stock return income amounts that are set at issue. Dividends don't normally change unless the issuing company's board of directors decides to raise or lower the dividend due to company financial performance. Dividend-paying stock, fixed-income bonds and preferred stock pay income to their investors.
Examine your needs for income. Determine the amount you need and how often you want it paid -- weekly, monthly, yearly or at maturity. Tax considerations also are important. Municipal bonds provide local, state and federal tax-free income, depending on where you live. However, the interest rates are considerably less than Treasury or corporate bonds because of the tax benefit. Income from dividends is taxed at a lower rate than regular interest income and interest income from Treasury securities is free of state income tax.
The structures of U.S. Treasury bonds, corporate bonds and municipal bonds are basically the same. Bonds pay interest every six months, unless structured differently at issue. The differences lie in the credit quality of the issuing entity and the tax treatment of the interest income. Preferred stock pays a fixed dividend, set at issue. It gives the dependable yearly income of a bond with the lower income tax rate of a dividend.
Common stock dividends may fluctuate according to the financial performance of the company. Dividends are paid quarterly and are declared by the company's board of directors, so they may change. Preferred stockholders will receive their dividends before common stockholders if the company defaults on dividends or declares bankruptcy. Common stock of public utilities is a conservative source of dividend income because this stock tends to trade within narrow trading ranges. The common stock of major industrial companies is riskier since the stock prices on these issues is also affected by the earnings performance of the company.
Annuities are insurance products. You make monthly payments into an annuity for a number of years, accumulating money within the annuity. Once the fund is annuitized, which means payment of income begins, a fixed amount of money is paid out every month based on the total amount in the fund and the actuarial assumption regarding how long the owner of the annuity will continue to draw the income. Income from annuities is taxed as ordinary income.
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