Do Bonds Produce a Monthly Income?

By: Tim Plaehn | Reviewed by: Ashley Donohoe, MBA | Updated May 29, 2019

Most bonds make semi-annual interest payments.

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The standard interest payment interval for investment bonds is twice a year or semi-annually. For investors who would like to receive monthly interest checks, there is one type of bond that is an exception to the rule and a couple of other paths to turn bond interest into monthly income. Select the bond investment vehicle that fits with your portfolio size and investment experience.

Tip

Bond investors will typically receive interest payments from these assets on a semi-annual basis. However, investing in multiple treasury bonds, a bond fund or closed-end fund which maintains a portfolio of bonds can provide more frequent, monthly payouts.

Ladder Interest Payment Dates

Although most bonds only pay interest twice a year, the do not all pay at the same time. A bond portfolio paying monthly income can be obtained with the purchase of six different bonds. One bond pays interest in January and July, the next in February and August and so forth to cover all 12 months of the year.

The U.S. Treasury issues new treasury bonds every month, so it is easy to put together six issues to get monthly checks from these government bonds. With municipal bonds or corporate bonds, an investment adviser or broker should be able to help find and select bonds with staggered interest payment dates.

Mortgage-Backed Securities

Pass-through mortgage-backed securities – MBS – are a type of bond backed by a pool of home mortgages. The bulk of MBS bonds are issued or guaranteed by the mortgage agencies of Ginnie Mae, Fannie Mae and Freddie Mac. As pass-through securities, these bonds make monthly payments as homeowners with mortgages in the pools make their payments.

The challenge with MBS investing is that each monthly payment includes both interest and principal amounts. To maintain the principal, an investor has to separate the two and reinvest the principal.

Evaluating Bond Funds

Bond mutual funds and exchange-traded funds – ETFs – own portfolios of bonds and almost all pay out interest earned from the bonds as monthly dividends. Funds are available that focus on government bonds, municipal bonds or corporate bonds.

Bond funds that invest in mortgage-backed securities separate out the interest and principal to make sure investors only receive interest. Bond mutual funds allow you to reinvest the monthly dividend payments if you want to compound your earnings over time.

Assessing CEFs and UITs

Closed-end funds – CEFs – and unit investment trusts – UITs – are less well known packaged investment products that provide monthly income from a portfolio of bonds. CEF shares trade on the stock exchanges and use leverage to provide some of the highest bond investment yields – for both taxable and tax-free bond types.

UITs have the unique feature among fund types of having a final maturity date when you know your invested principal will be returned. UITs are also available for both taxable and tax-free bonds including state specific municipal bonds.

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About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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