With rates lower than a sinkhole, what's a saver to do?
When you were 5, your father may have taken you on his knee, peered at you wisely, and said, "Don't reach for yield." Decades and many therapy sessions later, you've come to realize that Dad really wasn't very good with children.
But he did have good advice. It's true, one of the worst things you can do when short-term rates are low is to jump into risky high-yield investments. If you want to earn more than 3 percent or so, though, you'll have to face the possibility that you will lose money. The question is how to boost your income with only moderate risk. We have some suggestions, but consider them carefully before you invest.
Let's start with the proposition that rates are insanely low, particularly when you factor in inflation. The yield on the three-month bill sank to an annualized 0.34 percent rate Thursday. Inflation, meantime, has risen 4 percent over the past 12 months. Should inflation remain at that pace, you'll have earned a "negative" 3.39 percent - which is good only if you're one of those who just have too darn much money.
For savers and conservative, income-oriented investors, there just aren't many appealing options. If you buy a 10-year Treasury bill, you'll earn just 3.34 percent - still less than the current inflation rate. Even worse, you'll lock in a crummy rate for a decade.
The other way to beat the puny yield on a three-month T-bill is to make riskier investments. Let's use the current average money fund yield, 2.62 percent, as a baseline for relatively safe returns. And let's look at how you can score higher yields.
General Electric, for example, offers GE Interest Plus Corporate Notes, which pay 3.75 percent for investments under $15,000 and 4.05 percent for investments over $50,000. (www.geinterestplus.com). Why the extra yield? For one thing, the program isn't insured by the federal government; it's an unsecured obligation of General Electric. True, GE is a strong, highly rated corporation. Still, investing in one company is riskier than investing in a money fund, which is a basket of securities. Therefore, as a trade-off, GE pays higher rates.
You could step out further in the risk spectrum and invest in the Ford Interest Advantage Program, offered by the automaker's credit arm (www.fordcredit.com/interestadvantage). The program pays 4.15 percent for amounts less than $15,000 and 4.45 percent for more than $50,000. Why do Ford's notes pay more than GE's? Basically, because the GE Interest Plus Corporate Notes are backed by GE, and the Ford program is backed by Ford, which has a lower credit rating than GE.
Bear in mind, though, that we're still talking about piddling yields. Plop $100,000 into an investment yielding 4 percent and you get only $4,000. So if you're counting on investment income for your expenses, you'd better plan to live in the woods like a wild man.
Again, if you want higher yields, you'll have to take more risk. Funds that invest in mortgage-backed bonds issued by Ginnie Mae now yield an average 4.6 percent. Ginnie Maes, which are guaranteed by the U.S. government, have been relatively unscathed by the subprime mortgage mess. But they're not guaranteed, and their share prices will rise and fall.
Another suggestion: municipal bonds. These are long-term IOUs issued by states, cities and municipal entities, such as airports. Thanks to the credit crunch, munis must offer high yields to get investors' attention.
A five-year high-rated muni yields 3.07 percent, according to Bloomberg. But interest from munis is free from federal tax. If you're in the 28 percent bracket, you'd have to earn a taxable 4.26 percent to equal a 3.07 percent tax-free yield. Muni defaults are fairly rare, though not unheard of.
Another idea: a closed-end municipal bond fund. These funds trade on stock exchanges and have one peculiarity: Their market value is often less than the value of the securities they own. One such fund is Nuveen Insured Muni Opportunity fund (ticker: NIO). It owns bonds worth $14.25 a share; it closed Thursday at $12.86 a share, or a 9.75 percent discount.
The fund boasts a tax-free yield of 5.27 percent, equal to a 7.3 percent taxable yield to someone in the 28 percent tax bracket. Should municipal bond prices rise, the fund's share price will rise as well. Of course, the opposite is true, too - which is where risk comes in.
If you can stand even more risk, consider a blue-chip stock with a decent dividend and a history of raising them. One place to start is the Dividend Achievers, which have raised their dividends every year for a decade (www.dividendachievers.com).
The three largest dividend achievers are ExxonMobil (ticker: XOM, yield 1.66 percent), General Electric (GE, 3.48 percent) and Procter & Gamble (PG, 2.07 percent). Don't be discouraged by the small current yields; increases add up over time. ExxonMobil has raised dividends at an average rate of 5.3 percent over the past 25 years.
How much risk is right? That's for you to decide. But remember: The higher the yield, the more the risk. And if you reach too far for yield, you could take a fall.
WBJ Web Partners
Most Recent
Most Recent
0 Comments