Rebuilding Your Wealth: Bonds

Fixed-income investments have always been stereotyped as the stodgier cousins of stocks, but these days stodgy and secure might be just what you’re looking for. Still, buying fixed-income investments today doesn’t mean running to the safety of money-market accounts or Treasury bonds. Experts say both of those are currently returning next to nothing after inflation, even though inflation itself has slowed. The good news: Some fixed-income investments can now earn you as much as 10 percent—and you don’t have to take on the risk inherent to the stock market. Here are some attractive fixed-income options from conservative to aggressive.

Ginnie Maes

What are they? The Government National Mortgage Association, or Ginnie Mae, guarantees mortgage-backed bonds.

Why now? Unlike its cousins Fannie Mae and Freddie Mac, closely supervised Ginnie Mae avoided riskier mortgages, and Ginnies still pay far more than low-yielding Treasurys. These government-backed bonds are the “standard of a risk-averse portfolio,” says Bill Larkin, a money manager with Cabot Money Management in Salem, Mass.

Best way to invest: Stick with funds such as Payden GNMA (PYGNX), which yields 5.5 percent.

What are they? States and towns issue these bonds to fund everything from schools to sewers.

Why now? Thanks to credit market jitters and a favorable tax treatment, some municipal bonds now reward investors with unusually high payouts, as much as 6 percent annually, or the equivalent of a taxable yield of as much as 9 percent. Even with the credit crunch, the default risk is minimal. Since 1986 only 34 municipal bonds issued by the more than 10,000 government bodies rated by Standard & Poor’s have defaulted.

Best way to invest: If you invest more than $25,000, consider buying an individual muni bond from your home state, since it can offer significant tax advantages. Otherwise, go with a municipal bond fund such as Vanguard Long-Term Tax-Exempt (VWLTX) or a state-specific bond fund, which also can offer favorable tax treatment to in-state investors.

Energy Master Limited Partnerships

What are they? Companies that own oil and natural gas transporting pipelines.

Why now? MLPs can be volatile investments even when energy prices aren’t violently fluctuating. But the drop in oil prices this summer has made them particularly attractive now. MLPs currently sport hefty dividend yields and have a bright future since the nation likely will be spending billions on energy infrastructure over the next several years.

Best way to invest:Plains All American Pipeline (PAA) and Energy Transfer Partners (ETP) each have yields of 10.8 percent. MLP investors must file K-1 tax forms annually.

What are they? Just like in the U.S., foreign countries and companies sell bonds to finance themselves.

Why now? Investing in foreign bonds offers the benefits of diversification just like investing in foreign stocks does. And most countries didn’t get caught up borrowing as recklessly as the United States did. It has been a good year for debt in emerging markets, which often offer higher interest rates than domestic debt. A global economic slowdown, however, could depress bond prices.

Best way to invest: Let professional investors, such as the ones who run Pimco Global Bond Hedged (PGBIX) or its more aggressive sister fund, Pimco Global Bond Unhedged (PIGLX), figure out whether Bolivian or Belarusian debt is a better deal.