What are fixed income investments? Definition, types, advantages and disadvantages

Fixed income investments maintain wealth and provide passive income.

What is a fixed income security?

A fixed income investment is an asset or security that provides its owner with regular payments of income, usually in the form of interest or dividends. Common examples include bonds, preferred stocks and certificates of deposit.

Fixed income securities are valued by investors for the income streams they provide rather than their ability to appreciate.

What is Fixed Income Investing?

Fixed income investing is pretty much what it sounds like – investing specifically in fixed income securities like bonds and real estate investment trusts.

Fixed income investors are not looking for massive returns from speculative investments like growth stocks. Instead, they buy investments that are less likely to appreciate in value, but are likely to maintain at least stable value while providing passive income payments over time.

The objective of fixed income investments is to maintain wealth, generate income through interest and dividends, and avoid the losses that can arise from investing in more volatile securities like common stocks.

5 Examples of Fixed Income Investments

There are many types of securities that provide passive income to their holders. Below are some examples of securities preferred by fixed income investors.

Interest bonds

A bond is basically a loan that an investor makes to another entity in exchange for interest payments. Whether municipal, federal or corporate, bonds regularly pay interest until maturity, at which time the principal investment is returned to the investor. Treasury bonds issued by the federal government are generally considered the safest, and corporate bonds rated BB or lower are considered the riskiest.

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TheStreet Dictionary Terms

Certificates of deposit

Certificates of deposit, or CDs, are special accounts offered by banks and other financial institutions that allow customers to make a deposit and leave it intact for a specific length of time, such as 12 or 18 months, in exchange for cash payments. ‘interests. CDs generally offer higher interest rates than traditional savings accounts, and interest rates vary widely from bank to bank.

Favorite stock

Preferred stock, like common stock, represents partial ownership in a company, but unlike common stock, preferred stock almost always comes with a guaranteed dividend. Since much of their value comes from this “locked-in” dividend payment, the price of preferred shares does not tend to rise and fall as frequently or drastically as common stocks. Since preferred stocks are stocks, they are riskier than bonds or CDs.

Real Estate Investment Trusts (REITs)

REITs are companies that buy real estate, finance real estate purchases, or do a mix of the two. They are required to distribute at least 90% of their income to shareholders in the form of dividends, so they are particularly popular with fixed income investors.

Dividend-paying stocks

Some companies have a habit of regularly paying dividends to common stockholders, not just preferred stockholders. Common stocks are riskier than preferred stocks, bonds and CDs, but also have more potential to increase in value.

What are the advantages of fixed income investments?

Fixed income investments are a great way for an investor to maintain existing wealth while passively earning interest payments and dividends. They are relatively safe compared to other types of investments and they are less prone to volatility than stocks and commodities. Certain fixed income securities, such as bonds and CDs, tend to be financial havens during recessions.

What are the disadvantages of fixed income investments?

Although fixed income securities are safe and offer stability, they lack the upside potential of riskier securities such as growth stocks and options. With lower risk, the potential gains are lower.

In addition, certain fixed income securities such as bonds are subject to interest rate risk. If an investor buys a bond and interest rates rise, that bond loses its resale value. Inflation risk works the same way. If inflation outpaces a bond’s interest during its term, its relative yield may be reduced. Thus, the longer the duration of a bond, the more likely it is to be devalued by inflation.

How to invest in fixed income securities

Those interested in fixed income investing can manually create a portfolio of bonds of various issuers and durations, preferred stocks and REITs and other fixed income securities, or they can invest in exchange-traded funds (ETFs) or mutual funds. aimed at providing regular passive income payments. By choosing an ETF or mutual fund, an investor can gain exposure to a professionally curated portfolio of fixed income vehicles with a single investment.

Expense ratios are current as of June 2022.

ETF name Expense ratio

Vanguard Total Bond Market ETF (BND)


iShares Core US Aggregate Bond ETF (AGG)


Vanguard Total International Bond ETF (BNDX)


SPDR Bloomberg Barclays 1-3 Month T-Bill ETF


iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)


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