Common Stocks for Income

The vast majority of these offerings trade on major exchanges and may include features that render them even more advantageous than plain vanilla bonds.

Real estate investment trusts (REITs) are companies that own and operate income-producing properties such as shopping centers, offices and apartments. They pay nearly all of their taxable income to shareholders and consequently offer regular, high-yielding payouts to investors. However, investors should be aware that dividends paid by REITS do not qualify for the reduced tax on dividends.

Master limited partnerships (MLP) are typically resource-related companies in which the advantage resides in the companies' pass-through financial status. All income, gains, losses and taxable events pass through to the unit holder. These shares are not eligible for regular dividend tax treatment.

A business development company (BDC) is essentially a mutual fund that invests exclusively in private companies rather than publicly-traded ones. Investors can therefore participate in the world of private equity without being "accredited" investors, and still enjoy the liquidity of a traditional mutual or closed-end fund.

Closed-end funds are mutual funds with a fixed number of units that trade on the stock market. Many of these are invested in income producing securities like municipal bonds or preferred shares. Investors should be aware that the price at which a closed-end fund trades may be above or below its net asset value (NAV). Tax treatment will vary depending upon the fund's holdings.

Index exchange-traded funds are instruments that seek to mirror the performance of a single market index. Therefore, these ETFs allow an investor to buy or sell shares in a widely quoted government or corporate bond index. There are also ETFs that mirror several municipal bond and junk bond indexes. Fees are generally very low on ETFs, and annual taxable capital gains are minimal.

Preferred stocks are traditionally structured as perpetual preferreds, which means that they have no stated maturity date. However, companies have started issuing redeemable preferred shares that have a specific lifespan. Most preferred dividends receive favorable tax treatment, except those issued by REITs, and are senior to the company's common shares.

Exchange-traded debt securities (ETDS) are "bonds" that trade like preferred shares, meaning that they have all the features of bonds, but are available for purchase on the major exchanges. They usually have par values of $25 instead of $1000, and pay interest, not dividends. ETDSs are therefore not eligible for favorable dividend tax treatment. Investors should be aware that most are callable after five years.

Convertible preferreds are unique, as they are convertible into the issuer's underlying common stock. They have the advantage of a higher dividend payout and the potential for capital gains should the underlying common shares appreciate. The higher yields also cushion any downside in the common shares. Dividends from most convertible preferreds are eligible for the lower tax rate.

Mandatory convertibles are like convertible preferreds, except that they have a fixed conversion date and are convertible into the issuer's common stock at variable rates - depending upon where the common shares trade at the time of conversion. Mandatory’s generally compensate better than regular preferreds, but are not eligible for favorable dividend tax treatment.

Trust preferred securities are an ingenious way for companies to raise funds under more favorable tax terms. They are essentially debentures with proceeds that are paid out to investors in the form of preferred share dividends. Investors should be aware that debentures are usually at the low end of the credit spectrum, and payouts may be deferred until the redemption date of the security. Third party trust preferreds (TPTP) are repackaged preferred share and debt issues which are distributed by Wall Street's major brokerages. Distributions are usually paid semi-annually. Investors should be aware that these securities are usually callable after five years, and are not eligible for the 15% dividend tax rate.

For income investors who require safe, fixed distributions for a predetermined period, the above investments offer an alternative to bonds. As these trusts trade on major exchanges, they also offer transparent and stable pricing.