It's easy to be put off locking your money up for long in bonds or certificates of deposit when rates are so low—even the average rate on a five-year CD is now less than 2 percent.
But there is a fixed income strategy that can provide you with higher yields: laddering.
Here's how it works: You buy a portfolio of bonds or certificates of deposit at staggering maturities, whether it's over several months or years. As the bonds or CDs mature, you reinvest the proceeds into debt instruments that best fit your income needs.
For example, if you had $100,000 to invest in a bond ladder, you may put $25,000 in a one-year bond, a two-year bond, a three-year bond and a four-year bond (with each bond being one rung of the ladder). When the one-year bond matures, you'd reinvest in another four-year bond if you wanted to maintain the duration of the ladder, and take advantage of higher yields. (Typically, the longer the term of the bond or CD is, the higher the yield.) Regardless, cash would be available to you on a regular basis over that four-year period versus being locked up in a longer-term bond or CD.
A bond ladder can also provide some protection against rising interest rates. If rates increase, you can purchase higher-yield bonds or CDs with the income from the debt instruments already in your ladder. Many interest rate watchers expect the Federal Reserve to hike rates later this year.