Six Ways to Boost Your Investment Income

By BRETT ARENDS

If you need to live off your savings and investments, you're having a tough time right now. For tens of millions of Americans, it's a struggle.

Interest rates are on the floor. A one-year certificate of deposit barely pays 1% -- just $100 for $10,000 of savings. Yields on government and corporate bonds remain near historic lows. And yet your costs are rising. The official inflation rate is 1.6%, but it surely understates the reality for many people. Many household items are rising much faster than that, and with raw-materials costs booming -- from copper to cotton -- we can probably expect further rises ahead.

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Wesley Bedrosian

If your costs are rising by 5% a year, and you're only earning 1% in the bank, why not prepay some of tomorrow's expenses at today's prices?

What can you do? In this environment it can be a big mistake to try to force things by taking on too much risk. It may be sensible to be patient, hold lots of short-term CDs and wait for better opportunities. But you're not without options.

If you need income, here are six moves worth thinking about.

1. CD ladders

Certificates of deposit are the simplest way to earn interest while protecting your principal. Many people are locking themselves into multi-year CDs in order to earn an extra half point of interest. But it's a risk: It means their cash will be locked up, and that they'll miss out if rates rise soon.

Try a CD ladder instead: Put some money in CDs that mature in stages over the next two years. As each one matures, roll the money over into a new longer-term CD. This way you're earning a bit more interest, without losing liquidity. According to Bankrate.com, you can get a one-year CD earning 1.35% and two years earning 1.6% (both from Metropolitan National Bank of New York).

2. Prepaying expenses

So many people overlook this, even though it's obvious once you think about it. If your costs are rising by 5% a year, and you're only earning 1% in the bank, why not prepay some of tomorrow's expenses at today's prices?

That's the equivalent of earning 5%, tax-free. You can stock up on nonperishable foods and buy household goods in bulk. Maybe your landlord will cut you a deal: If your rent is going up each year, can you avoid a hike by paying next year's early? A lot of companies really value getting cash flow early. In this environment it makes sense to ask.

3. TIPS

While no bonds look cheap right now, Treasury inflation-protected securities, or TIPS, may be your "least bad" option.

These are bonds issued by Uncle Sam. They pay a certain interest rate plus the official inflation rate each year. Longer-term TIPS currently offer inflation plus 2% a year. It's not great, but it's OK. That's 3.6% now, and if inflation were to go to, say, 5%, you'd get 7%. You can buy individual TIPS bonds, or buy a basket through a mutual fund. PIMCO 15+ Year U.S. TIPS Index exchange-traded fund (LTPZ) holds only higher-yielding longer-term bonds.

Note prices can fluctuate, and the bond income is highly taxable -- for technical reasons -- so TIPS should be held in a tax-sheltered account, like an individual retirement account, whenever possible.

4. Blue-chip stocks

Solid companies like Campbell Soup (CPB), General Mills (GIS), Johnson & Johnson (JNJ), H.J. Heinz (HNZ), Chevron (CVX) and Huggies maker Kimberly-Clark (KMB) offer dividend yields over 3%. A few -- including American Electric Power (AEP), Altria (MO), Bristol-Myers Squibb (BMY) and AT&T (T) -- top 5%.

Judy Saryan, a veteran fund manager at Eaton Vance who specializes in income stocks, also sees great deals in Europe -- like Royal Dutch Shell (RDS.A), Italian oil giant Eni (E) and Spanish telecom giant Telefonica (TEF). All stocks involve risk. But dividends tend to rise over time, offering some cushion against inflation, and they are taxed at a maximum rate of 15%, compared to a maximum of 35% on ordinary income.

Good equity-income funds will buy a spread of such stocks. Among low-cost ETFs, the iShares Dow Jones Select Dividend Index fund (DVY) yields 3.5%, and the International Select Dividend Index (IDV), 4.5%.

Ms. Saryan's funds include Eaton Vance Tax Advantaged Dividend Income (EVT), a closed-end fund that trades on the stock market like a stock. The fund's shares currently sell for 6% below the net asset value, so you get more stock for your money, though the flipside of that can be some volatility. The distribution yield is 7.4%.

5. Selective bonds

Thirty-year Treasury bonds will pay you 4.7%. Funds that invest in high-yield corporate bonds and preferred stocks (which are a kind of perpetual bond) can pay more than 6%. Examples include the iBoxx $ High Yield Corporate Bond (HYG) and iShares S&P Preferred Stock Index (PFF) ETFs.

These can have their place in a portfolio, but anyone going overboard on these right now in a desperate hunt for income "needs their head examined," warns Larry Glazer, portfolio manager at Mayflower Advisors in Boston.

The reason? The income comes with risks. Many investors may not realize it, either.

Longer-term bonds and preferred stocks can put you at serious danger from inflation down the road. When inflation or short-term rates rise, or both, the prices of these bonds are likely to fall. That's especially true of preferreds.

As for high-yield corporate bonds: They're issued by riskier companies. They can be very volatile. Bond investors may get a better deal in government bonds issued by emerging markets like Brazil and Malaysia, where faster economic growth means interest rates are already higher. The WisdomTree Emerging Markets Local Debt Fund (ELD) has a 5.3% yield. Such bond funds do involve risk, including fluctuating currencies.

6. Master limited partnerships

These are specialized high-yielding stocks that let you invest in certain industries, particularly in oil and gas pipelines. They come with certain tax breaks and wrinkles.

The best known, Kinder Morgan Energy Partners (KMP), yields more than 6%. And there is now a low-cost ETF, the Alerian MLP fund (AMLP), that will invest across the gamut of MLPs for you.

But look out: MLPs have risen a long way lately as investors chase income. Yields have fallen. MLPs may be too popular. And they could get hit if interest rates rise.