If you're looking to diversify your portfolio with investments that offer a steady stream of income, then consider fixed income securities such as bonds.
When you invest in a bond, you are a company's lender and the bond is like a note of debt—a promise to pay back the money you've loaned, with interest. Cities, states, the federal government, government agencies, and corporations issue bonds to raise money for purposes such as building roads and improving schools or technology.
There are four key features to fixed income securities that make them desirable to investors: diversification, capital preservation, income generation, and potentially favorable tax treatment. Each feature provides a unique set of benefits that vary depending upon the type of fixed income security.
Diversification, capital preservation, income generation, and tax exemptions for U.S. expatriates
Fixed income securities, specifically high-credit-quality bonds, can help smooth out the highs and lows in a stock portfolio. That's because stock and bond prices have historically tended to move independently and with different magnitudes at any given time. However, diversifying with bonds does not ensure a profit and does not protect against a loss in a declining market.
Fixed income securities are ideal when preservation of capital is a priority. Specifically with bonds, principal is usually returned at a set maturity date. Higher-quality fixed income investments, like Treasuries, have the best potential for protecting principal. Though preserving capital is a key feature of fixed income securities, there is still the risk that the issuer of the bond will not make good on paying back the principal.
Fixed income securities are typically designed to provide a regular, predictable stream of interest payments on set dates. Keep in mind that there is a risk that the issuer will not make good on the promise to pay interest income.
Tax exemptions for U.S. expatriates
Some fixed income securities have preferential tax treatment where coupon payments may be exempt from federal and state income taxes. Most debt securities are also not subject to U.S. estate tax for non-U.S. persons.
Keep in mind that potential tax advantages are generally factored into the price of any bond (and therefore its yield). Schwab recommends consulting a qualified tax advisor for specific individualized tax advice.
Whether your goal is to diversify your investments, save for the future, receive dependable income, or minimize taxes, fixed income investments may have a place in your portfolio.
Schwab offers an extensive selection of fixed income investments, including individual bonds, Treasuries, and bond ETFs.
Contact us to learn more about how these types of bonds can fit into your overall portfolio.
What to know about trading bonds.
Interested in bonds but not sure where to start? These four steps can help you narrow your search.
- First, learn which types of bonds may be right for you by deciding your investment goals.
- Second, consider how long your investing horizon is.
- Third, determine the level of credit risk you're comfortable with.
- Finally, determine how involved you want to be in managing your investments.
With that information in mind, you should be ready to start your search for the bonds right for you.
Why invest in bonds with Schwab?
Schwab offers multiple ways to invest in bonds so you can choose the method right for you.
Tools and research for self-directed investors.
Use Schwab BondSource® to screen more than 80,000 bonds from close to 200 dealers.1
Timely market analysis through expert insights.
With timely analysis focused on what matters for investors, Schwab's insightful perspective and practical advice can help you make better investment decisions.
Dedicated specialists for complex needs.
If you have complex needs and require guidance on fixed income strategies, you can get help from our dedicated team of fixed income specialists.
How do I invest?
- What is the return on my bond?
- What happens to my interest payment if rates go up or down?
- What is bond laddering?
- What is the difference between coupon and yield for fixed income securities?
- What are the risks?
- What does the credit rating mean for Moody's or S&P?
Start investing in the U.S. today.
Start investing in the U.S. today.
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