Furthermore, even those investors who seek growth can achieve diversification through income-producing vehicles. And one of the most popular ways to achieve income is through bonds. Typically, the highest-yielding bonds are those issued by a corporation. But you won't get to keep all the income you earn from corporate bonds, because these bonds are fully taxable. Therefore, your actual return will be less than the bond's stated interest rate.
Municipal bonds are a popular alternative to taxable bonds.
When you invest in municipal bonds, your income is exempt from federal income taxes. Many investors in high tax brackets have long used municipal bonds to provide tax relief. The answer lies in a term called the taxable equivalent yield. For example, if you're in the 28 percent bracket and you're considering a municipal bond that earns 5.50 percent, you'd have to find a taxable bond that pays 7.64 percent to earn the same amount of income. When you compare taxable bonds with tax-free issues, make sure that the maturity is the same for both types of bonds.