How to Invest for Income in Government Bonds
The U.S. federal government issues bonds on a regular basis that have durations of between six months and 30 years. If you are seeking income, bonds are viewed by many as fairly conservative income-generating investments. Federal bonds rely on the continued strength of the government but are not actually insured in the way that bank products like CDs are protected by the Federal Deposit Insurance Corp. Bonds are debt instruments, with the government borrowing money from bondholders, who are actually creditors.
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Instructions
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Contact a local brokerage firm or bank and arrange an appointment to meet with a broker. You must establish a brokerage account to hold your bonds. You can buy EE bonds directly and hold the certificates yourself, but these bonds are bought at a discount and their interest compounds, so the bonds reach face value at maturity and you don't receive the interest as an income stream. I bonds pay interest on the face value, but you receive it only when you redeem the bond, so these bonds are not suitable for creating steady income. A broker can purchase other types of bonds that are suitable for creating an income stream.
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Go to the broker's office and provide identification so you can set up a brokerage account. You must complete a personal profile that lists your basic information and financial assets, and then sign an account agreement. Explain to the broker that you want to invest in bonds to generate income. Do not buy zero coupon bonds, which are sold at a discount to par value. These work like EE bonds and do not pay interest while you hold them, since you get the face value of the bond at maturity. Most types of bonds pay interest twice annually. Ask the broker to provide you with a list of bonds with varying terms and interest rates.
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Calculate how much income you need to cover your basic expenses, then deduct the amount of income you currently have from that amount. Tell the broker the amount you need to make on a monthly basis so the broker can find the best options for you. Review the available bonds to find the ones paying the highest returns. Try to stagger your bonds so the bonds have different maturity dates. Doing this means you'll receive income at different times rather than having all of the bonds paying on the same semiannual dates.
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Write a check to the brokerage firm for the total sum of the bonds you elect to buy. The transaction occurs the same day that you make the purchase request. The interest payments are received in your brokerage account, from where you can withdraw money on a regular basis or reinvest it in other types of investments.
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Tips & Warnings
To diversify your holdings, you can buy shares in a bond mutual fund rather than buy individual bonds. If you need to sell a bond, you might have to sell it at a discount if other bonds with higher yields are available at the time. If you own bonds indirectly through a mutual fund, the liquidity of any one bond does not significantly affect you.
Ask the broker if any of the bonds are callable, which means the government can pay you back and terminate the bonds at any time. Callable bonds often have high rates due to the risk of the call, and people who rely on these bonds for income run into problems when the bonds are called.
