If you're trying to boost your annual income you can park some of your in cash certificates of deposit or federal bonds. These types of securities are regarded as low-risk investments and when you take few risks you can't expect to make much money. However, if you're willing to take some risks with your principal there are other types of income-generating investments that suit the needs of aggressive investors.
Corporations and governments borrow money from investors in the form of loan agreements known as bonds. You lend some money to a city or business for a set number of years and when the bond term ends you get your cash back plus interest. Bonds are rated based on the creditworthiness of the issuer. If a city or state can't raise enough tax revenue to cover its obligations, it's seen as a high-risk borrower. Struggling corporations are tarred with the same brush. Bonds sold by risky borrowers are known as junk bonds. You can expect higher-than-average interest payments on these bonds, but you could lose everything if the bond issuer goes bankrupt.
Mortgage Backed Securities
Banks and mortgage companies sell home loans to investment firms that package large numbers of these loans into investment funds. You can buy bonds known as mortgage-backed-securities that are tied to these funds. As a bondholder, you get a cut of the interest payments from the underlying bonds. Some MBS funds contain low-risk mortgages issued to creditworthy borrowers. Others contain so-called subprime loans made to people with limited income or poor credit. Interest payments on subprime funds are much higher than those on conservative funds, but your shares in such funds could lose value if enough borrowers default on their mortgages.
Stocks -- unlike bonds -- have no principal guarantees, meaning they are generally more risky than bonds. Not only that, if a company goes bust, its bondholders have first dibs on its assets ahead of the stockholders. Large companies often pay dividends to shareholders, and these dividend payments are the companies' way of sharing their assets with shareholders. You can use these stocks to boost your income. If a company can afford to pay dividends, the chances are that it is in good financial shape. However, dividend-paying stocks can be risky investments over the long term, as your stocks could plummet in value if the issuing company run into problems.
Derivatives work somewhat like insurance contracts, but they are negotiated privately between financial companies and are not regulated by the insurance industry. Basically, one financial company agrees to insure the assets of another. If the insured company's assets drop in value, the other company must make a payout to cover its losses. You can buy shares in mutual funds that contain thousands of these agreements, which are known as credit default swaps. You receive regular income payments that are derived from the premiums paid on the underlying contracts. However, your shares in the fund drop in value if a payout must be made on one of the underlying contracts.
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