How To Earn Extra Income With This Bond Strategy
Written by
Marc Guberti
Edited by
Levi Leidy
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If you want a stable, predictable income instead of risking your cash in the stock market, bonds are a great alternative, especially if you use the bond ladder strategy that Fidelity recently discussed. You can put your extra cash to work in strategic bonds that let you generate cash flow while reclaiming access to your principal when you need it.
You can invest in any bond with any maturity, but spreading your capital across a portfolio of bonds can give you more flexibility as you increase your passive income.
What Is a Bond Ladder?
A bond ladder is a portfolio of bonds with different maturities. Spreading the bond maturities across months and years lets you lock in favorable interest rates while receiving your principal back in increments.
For instance, if you want to put $5,000 in bonds but need $2,000 back in six months, you can put $2,000 into a bond that matures in six months and the remaining $3,000 in a bond that matures in one year. Some investors get more complex with their bond ladders, opening positions in bonds that mature in anywhere from three months to 30 years.
Some investors also allocate their money based on a bond’s rating. A highly rated bond is safer, but it has a lower interest rate. Bonds with lower ratings are riskier but come with higher rates. In addition to creating a bond ladder that considers maturity dates, investors may also create a bond ladder that allocates money across bonds with different ratings.
Why Bond Ladders Make More Sense Right Now
Bonds are sensitive to interest rate fluctuations. Any time the Federal Reserve reduces rates, bonds become more valuable since they offer higher rates, and the Fed cut rates multiple times in 2025.
Starting a bond ladder now lets investors secure high-interest bonds before potential future rate cuts. The longer it takes for the bond to mature, the more you will receive in elevated interest payments.
Some investors are also diversifying their bond portfolios based on regions. For instance, international bonds have been performing well amid a weakening U.S. dollar. However, that trend will reverse if the U.S. dollar gains momentum.
Why Some Investors Avoid Bond Ladders
Bond ladders are optimal for risk-averse investors who want to earn some extra cash with their existing money, but there are reasons why you shouldn’t rush headlong into these assets. Lower interest rates are a catalyst for the stock market, and investing in an index fund can generate higher returns than bonds.
Furthermore, bonds are less favorable when it comes to tax treatment. All of the money you receive from a bond is treated as ordinary income. However, you don’t pay taxes on your stock positions unless you sell them for a profit. Any dividends are treated more favorably from a tax perspective, which results in a lower tax bill.
Inflation is another factor that influences the real returns of a bond ladder. Inflation and taxation can make the real return of a bond ladder strategy look much smaller than what you could have done with the S&P 500.
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