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For decades, bonds have served as a popular investing and retirement planning vehicle. But with low yields, many corporate and government bonds aren’t pulling their weight these days. And when you consider rising inflation rates, long-term bonds can also be a poor choice, especially if you get a fixed-rate.

However, there are numerous bond alternatives investors can consider that still provide fixed-income and lower risk. And when used in combination, it’s possible to build a diverse portfolio that generates meaningful returns, even with high inflation rates and market downturn.

The Best Bond Alternatives Right Now

Below, you’ll find some of our favorite bond investing alternatives that can provide regular income and lower risk.

1. Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are one of the most popular bond alternatives. This investment vehicle was created in the 1960s to provide regular investors a way to invest in funds that manage a portfolio of properties, which up to that point had been open only to accredited investors.

There are also numerous benefits to investing in REITs like:

  • Potential Income Generation: REITs must distribute at least 90% of taxable income back to shareholders as dividends.
  • Low Barriers to Entry: Thanks to real estate crowdfunding sites, you can invest in various REITs starting at just $10.
  • Passive Investment: REITs are managed, so you can benefit from having real estate in your portfolio without having to become a landlord yourself.
  • Returns: One final benefit of REITs is that real estate historically returns more than bonds and can also act as an inflation hedge and excellent alternative asset class.

Here are some crowdfunding platforms you can use to add real estate to your portfolio:

Options like Fundrise are an excellent alternative to bonds for beginner investors since you only need $10 to invest. But you can explore other options, like Streitwise if your goal is dividend income.

2. Dividend Stocks

Bonds have historically attracted investors because the provide fixed-income and low risk. But when inflation is high and bond yields can’t keep up, this fixed-income isn’t always worth it.

However, another bond alternative you can consider is to invest in dividend stocks. This strategy takes on more risk than bonds since individual stock investing can be much more volatile than a fixed-income play like bonds. But the upside is twofold: you can get higher returns and potentially benefit from shares appreciating.

And if you stick to the trusty dividend aristocrat list, you can invest in companies that have increased their dividend yields every year for at least 25 years straight. This includes massive companies like Johnson & Johnson, McDonald’s, Pepsi, and Procter & Gamble. And if you’re investing for the long-term, dips in share price might not disturb your too much since you’re still generating dividend income.

Pretty much every leading online stock broker lets you trade stocks and ETFs without paying commission. Brokers like Ally Invest and TD Ameritrade are excellent options if you want great customer support and to explore banking features as well. You can also use investment apps like Public to trade from your smartphone and invest in fractional shares.

3. Master Limited Partnerships (MLPs)

Though not as well-known as REITs, MLPs or Master Limited Partnerships have been in use since the early 1980s. An MLP is structured as a partnership between general partners and the limited partners.

The general partners manage the day-to-day operations. They usually hold a minority stake in the partnership. The investors provide the majority of the capital. Instead of being private, these partnerships are traded on an exchange. And instead of selling shares, an MLP sells “units.” Each unit entitles the investor to a share of the income the MLP produces.

The MLP structure may seem different from a REIT’s, but the idea and principle is the same. The general partners enjoy special tax benefits as long as they distribute 90% of their income in the form of dividends.

However, congress limits the use of MLPs to the capital-intensive industries of energy and natural resource sectors. Generally, MLPs raise capital for the nonvolatile yet essential support and logistics sectors of the energy industry. Examples include refining, storage, and pipeline construction.

Many MLPs offer yields far in excess of what can be found in the stock market or with bonds. And people often invest in them as slow-growth yet stable income producers. The fact that energy, like real estate, outperforms during inflationary periods is also a handy bonus.

4. Preferred Stocks

Another popular alternative to bond investing is to invest in preferred stocks. These stocks pay you a regular dividend but also get paid first over common stocks. This means you receive dividend income but also get paid first in the event of something like a merger or bankruptcy.

Investing in preferred stocks is somewhat of a middle ground between bonds and common stocks. You get regular income, but you have some increased security because of the payment priority. And preferred stocks often have a callability feature where you can sell your shares at a predetermined price. This also adds some security if you’re looking for regular income and less risk.

You don’t get voting rights with preferred shares, and there’s usually less appreciation potentially than growth stocks offer. However, you can still find much higher returns than bonds usually offer thanks to dividend income.

5. High-Yield Savings Accounts

With inflation on the rise, we’re not massive fans of parking money in a savings account as an investment. However, if you’re looking for a short-term investment or somewhere to hold your emergency fund, using a high-yield savings account isn’t a bad idea.

Plus, the rise of neobanks and various FinTech companies has seen an increase in mobile banking apps with some impressive interest rates. Some of our favorite high-yield savings accounts include:

  • Aspiration: Earn up to 5% APY on balances up to $10,000.
  • CIT Bank: Earn 1.65% APY with its Savings Connect account.
  • Current: Earn 4% APY on up to $6,000.
  • Varo: Earn up to 5% APY on up to $5,000.

Between these options, you should have plenty of places to store some extra cash and still generate decent returns (for a savings account).

6. Alternative Assets

One final bond alternative investors can consider is to invest in various alternative asset classes. During periods of high inflation and market downturns, alternative assets are often seen as an inflation hedge and become more popular. And you don’t have to give up income generation either just because you’re investing in alternative assets.

For example, one popular strategy is to invest in gold or silver ETFs or mining stocks that pay dividends. This adds commodities to your portfolio in a sense, but you still generate income.

The same strategy applies for farmland. For example, platforms like AcreTrader and FarmTogether let you invest in farmland, and shareholders earn from rental payments from farmers and potential appreciation. You can take things one step further and even invest in cattle with companies like Agridime, which promises 15% or higher returns.

The downside of alternative assets is that they’re often illiquid. Plus, many platforms are only open to accredited investors. But alternative asset classes can still be an excellent bond alternative if you’re shying away from the market and want to diversify your portfolio.

Factors to Consider When Choosing Bond Alternatives

Now that you know some popular alternatives to bonds, here are several factors to consider before making an investing decision.

Investing Goals & Risk Tolerance

One of the most important considerations when picking a bond alternative is your overall goal. Are you mostly looking for fixed-income and as low risk as possible? Or do you value growth more and are willing to stomach a bit of volatility and risk?

Start by outlining your investing goals in terms of the returns you’re looking for. Next, think about your overall risk tolerance and what’s acceptable to you. Usually, knowing these two factors will point you in the right direction for how to build your portfolio.

Timeframe

One advantage of bonds is that you know exactly how long you’re investing for since bonds have a maturation date. This makes planning your short or long-term investments very simple.

With bond alternatives, you often have more control over if and when you sell. So, it’s important to consider your overall investing timeframe so your level of risk matches up.

For example, long-term investors can typically take on more risk since time and compound interest are on their side. But if you’re investing for the short-term, safer investments like bonds, CDs, or a high-yield savings account can make more sense.

Liquidity

If you sell bonds before their maturation date, you generally pay penalties. But they’re a somewhat liquid investment since you can exit and get your cash if there’s an emergency.

In contrast, some bond alternatives are highly iliquid. Alternative assets and real estate are two prime examples. A lack of liquidity isn’t always an issue if you’re investing for the long-term, but it’s another important factor to consider.

I Bonds

Many investors shy away from bonds because of low yields and long maturation periods. But with I Bonds, which are U.S. savings bonds backed by the federal government, you avoid both of these downsides.

Right now, I Bonds are paying 9.62% interest for bonds purchased through October 2022. These bonds earn interest using a fixed rate and a rate that’s based on inflation, so this is an inflation-proof investment by design. In other words if the inflation rate increases, so does I Bond yield.

You can purchase $10,000 per year through TreasuryDirect. You must hold your bonds for at least one year. And if you sell them before five years, you lose the previous three months of interest.

A one-year minimum hold period isn’t locking up your money for that long. And at a 9.62% return, even sacrificing three months of interest by selling early isn’t the largest blow.

Bottom Line

Bonds are a safe, stable investment, and you don’t have to ditch them completely. And if you want to generate income during your retirement, they’re not always a bad idea.

That said, high inflation is usually bad news for most types of bonds. And younger investors with a longer investing timeframe can likely find higher returns with other assets, like ETFs and stocks.

Ultimately, you need to decide on what asset allocation you’re looking for and how/if bonds fit into this equation. In any case, these bond alternatives can help you build a portfolio that produces income without taking on too much risk.




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