There is a range of different ways to earn interest off investments. In this case, a steady dividend payment will be considered interest from an investment. Investors looking for yield must always be aware of the risks involved. If risk-free Treasury bonds or CDs are paying 2 to 3 percent, investments that pay much higher yields will put your principal at risk. That said, there are always interesting opportunities for investors looking for yield. Yields are as of February 2010.
If Treasury bonds are considered the safest interest bearing investments, high-yield or junk bonds are at the other end of the risk spectrum. Junk bonds are issued by corporations with low credit ratings, so they must pay higher rates of interest to borrow money. Except for very sophisticated investors, it is best to buy junk bonds through a mutual fund or exchange-traded fund (ETF). The SPDR Barclays High Yield Bond ETF, symbol JNK, has a current dividend yield of 12.15 percent and the iBoxx $ High Yield Corp Bond ETF, symbol HYG, has a current yield of 9.59 percent.
Master Limited Partnerships
Master Limited Partnerships, or MLPs, are businesses that must pass through the majority of their free cash flow as distributions to the shareholders. MLP shares trade on the stock markets like any other stock. MLP companies are in businesses like energy exploration and production, pipelines and shipping. These stocks will increase or decrease their distributions based on the market prices of the products they provide. The BearLinx Alerian MLP Select Index, symbol BSR, is an ETF that holds only MLPs and currently yields 10 percent. Inergy, L.P., symbol NRGY, is a propane delivery company that yields 7.8 percent and has increased its distribution every quarter for the last eight years.
Real Estate Investment Trusts
Real Estate Investment Trusts are another type of stock that must pass through earnings to shareholders. REITs own commercial properties such as apartment buildings, shopping centers and office buildings. In early 2010, the average REIT had a dividend yield of 5.7 percent. The jobs and housing crisis has apartment focused REITs such as Sun Communities, SUI, and American Capital Agency, AGNC, yielding over 13 percent.
If you really want to protect your principal, the best source of income investing is Treasury notes and bonds. At this time, the 10-year Treasury is yielding about 3.8 percent. A laddered portfolio with bonds maturing every year or so will allow an investor to always reinvest at the longest maturity/highest yield and still have bonds maturing on a regular basis that can be reinvested at current rates. A Treasury ladder is the best way to protect principal in a rising interest rate environment.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.