Q: Interest rates on CDs are a joke. Is there a way to get a decent yield on my money without betting on risky stocks and bonds?
A: There's a harsh reality about investing: Risk and return are interlocked.
Risk, or the size of the swings of the value of an investment, is the price you pay for a shot at returns. Stated another way, if you want a chance at decent returns you need to take some risk. If you don't take any risk, similarly, you can't expect to get much of a return.
Avoiding risk has become especially painful now that interest rates continue to plunge. Investors who don't want or can't afford to lose even a penny of principal are being forced to endure some extraordinarily low returns.
Just to give you an idea, consider the yield on what is considered one of the safest investments around: The 10-year U.S. Treasury note. Currently, investors who buy the 10-year Treasury get a yield of 1.5%. If inflation is 1.5% or more over the next 10 years, which isn't hard to imagine, that means investors are essentially getting no return on their money. They just want their money back.
Most interest rates, including those of CDs, take their cues from the rates of 10-year Treasuries. If Treasuries are paying next to nothing, then CDs are going to pay even lower rates since they typically mature in less than 10 years, making them even safer yet than 10-year Treasuries.
Given such low rates, investors looking for yield are puzzled on what to do. The answer is that you're likely going to have to be more creative, and at the same time, take on more risk if you want more return.
Some investors might turn to the corporate and municipal bond markets.
Despite the economy's condition, many companies are in solid financial position. Yields on corporate bonds are much more attractive than Treasuries and CDs.
Investors also might seek shares of companies that have increased their dividends every year for at least the past 10 years, says Tom Cameron, portfolio manager of the Goldman Sachs Rising Dividend fund. Anyone who looks extra hard might find stocks that have increased their dividends over the past 50 years, giving them some stability, he says.
There are a number of companies that have a solid reputation for boosting dividends over a long period and that have had impressive dividend growth the past decade. These include Lowe's low, McDonald's mcd and Fastenal fast.
But does this mean you should go out and pile into dividend-paying stocks? Absolutely not. Dividends are just part of a diversified basket of income-producing investments. Also, keep in mind dividends can be stopped or cut at any time.
There are other options. Master Limited Partnerships (MLPs) trade on stock exchanges and typically yield anywhere from 6% to 8% a year, Cameron says. Most of these companies make their money carrying natural gas through pipelines and getting paid for the service. The stocks tend to be very stable and the barriers to rivals' entry in the business are high.
Investors can buy a mutual fund that owns MLPs. Or investors can buy their own MLPs to avoid the mutual fund fees. There are scores of MLPs and it's important for investors to choose their favorites. Some MLPs with notable dividend yields include Enterprise Products EPD, Magellan Midstream MMP and Plains All American paa.