Boost your income even when interest rates fall

If you depend on your investments to provide some of your income, you've probably been concerned about falling interest rates during the past couple years. In fact, rates are now as low as they've been in 14 years so what's an investor to do?

Actually, you have some pretty good choices. For example, you may want to build a "bond ladder" by investing in bonds with different maturities. You also may want to consider investing in high-quality stocks and mutual funds that have consistently increased dividends.

Let's take a look at both techniques:

Building a bond ladder'

If all your bonds mature at the same time, you could be at a disadvantage if market interest rates are low. Where will you put your money to gain a reasonable income stream? One possibility is to create a bond ladder.

By owning a group of bonds that mature at different times, you can help protect yourself from the effects of fluctuating interest rates. If rates are low when some of the bonds in your ladder mature, you'll still have some higher-yielding "rungs" working for you. And when rates are high, you can obviously reinvest your bond proceeds at a more favorable rate.

Dividends

Buying stocks and mutual funds that consistently increase dividends is another good idea. Years ago, stocks generally paid out more dividends than they do today. Now, many companies prefer to reinvest profits into their business, with the hope of becoming more competitive and, ultimately, increasing their share price. And yet dividends have not disappeared.

Over time, if you invest in a company that has steadily increased its dividends, and it continues to do so in the future, you can potentially boost your income. Of course, you must find those stocks, as well as those mutual funds that invest in dividend-paying stocks.

You can find dividend producers in almost all market sectors. If you're interested in a particular stock, and you wonder what dividends it pays out, look in the company's annual report. If you're looking at mutual funds, try to find ones in the "growth-and-income" category.

Be aware, though: Equities and equity-based mutual funds are subject to market risk, including the potential loss of principal. Above all else, look for quality. Remember, you're not seeking dividends for a one-time payment you want to increase your flow of income for years to come. That's why you'll want to invest in only the highest-quality stocks and mutual funds.

These are the types of investments that have continued to raise their dividends over time. A financial professional can help you find those stocks and funds that have good dividend-paying prospects but keep in mind that these investments do not offer a fixed rate of return and may not distribute future dividends.

As you move closer to retirement, it may become more and more important for you to increase your investment income. Also, inflation can have a big effect on your retirement income. If you retire at 65 and live another 20 years, then, even at a modest inflation rate of 3 percent, your cost of living will nearly double. Consequently, you need to make sure your investment income outpaces inflation. So, give some thought to bond ladders and dividend-producing investments.

(Betty J. Neal, CFP, is an investment representative with EdwardJones in Springfield.)