Fixed-income investors, facing the leanest times in years because of declining interest rates, don't need to accept paltry 5% returns on certificates of deposit to maintain the secure and consistent income to which they've grown accustomed.
A number of alternatives pay a little more and don't require jeopardizing principal. Some investors may be able to put their money in exactly the same instruments as before, but do it in a slightly different way to make substantially better returns, industry experts say.
If you invest in CDs, for example, you might be wise simply to start shopping around a few weeks before the deposit matures. To make shopping easier, you can subscribe to any number of publications that track interest rates, such as Bank Rate Monitor in North Palm Beach, Fla., and Jumbo Rate News in Coral Gables, Fla. These publications are relatively expensive, however, so it doesn't make sense to subscribe unless you have a lot of cash to invest.
A more economical option is just to read the newspaper. Many papers publish locally available interest rates. One recent listing showed that rates for one-year CDs ran from about 5% to 6.4%. That 1.4% difference is worth $700 annually on a $50,000 deposit.
Investors in Treasury securities can save at least the brokerage commission by buying their bills, notes and bonds directly from the government--in person or by mail. The Treasury's non-competitive bidding process allows individuals to purchase bonds by contacting one of 37 Federal Reserve banks across the country and filling out an application.
Those who don't need their money right away also might consider going into slightly longer maturities. The rate on six-month treasuries is running about 5.5%; the rate on a five-year note is roughly 7%.
If you don't think interest rates are going to rise any time soon and you usually just roll your old T-bill into a new one, you'd be better off with the longer-term note, said John H. Charlesworth, vice president and chief debt strategist at Merrill Lynch. He said he does not recommend the 30-year bond, though, because it doesn't pay much more than a five-year note and it locks up capital for half a lifetime.
Even better returns can be had by buying the debts of government agencies and corporations, added Charlesworth, but these can sometimes involve more cash, more sophistication and more risk.
If you don't have any of the above but but want higher returns and reasonable security, consider mutual funds that buy intermediate-term bonds. These funds are all sold by prospectus--an investment circular that gives a run-down of the risks, the types of bonds the fund buys and its investment strategy.
The fund company is usually also willing to provide a history of the fund's performance over time and an estimate of expected yield. Pay particular attention to mutual fund "loads" and fees, however, because these will come off the top of your investment's return.
Mortgage securities, such as Fannie Maes, Ginnie Maes and collateralized mortgage obligations, are another option for those who want a higher return at limited risk. In times of rapidly declining interest rates investors may earn less than they anticipated, however. The reason is that some borrowers pay off their mortgages early, which deprives investors of several years' worth of interest.
If you are willing to risk some principal, you should also consider buying into mutual funds that invest in utility stocks, or just invest in utility stocks directly, said Geraldine Weiss, editor of Investment Quality Trends in La Jolla.
Utilities often pay rich dividends, Weiss noted, and now their yields are exceptional compared to the options. Yields depend on the price paid for the stock. Currently, Weiss said, Allegheny Power yields about 7.7%; Northeast Utilities pays about 8%, and Atlantic Energy's stock dividend yields about 7.9%.
Investors should not expect these companies' stock prices to rise rapidly, though. As a rule, utility stocks merely inch ahead, Weiss noted. And, of course, there is no guarantee that the stock price won't fall.
What you should not to do in these difficult times is change your long-term investment strategy simply to get a higher rate of return. You should not start investing with individuals and brokers you don't know because they make attractive promises. And you should not buy investments that you don't fully understand. Any of these changes are ways to quickly lose money that you've probably spent a lot of time and trouble protecting.
"Investors who are used to 8% and 9% returns are now getting 5% to 6%, and that is making them easy prey for risks that they may not be psychologically prepared to bear later on," said Theodore Giuliano, general partner at the New York investment house of Neuberger & Berman. "Fixed-income should be about low risk, high quality and protection of purchasing power."
Coupon Rates on Two-Year Treasury Notes Treasury notes are one-to five-year obligations of the U.S. government. The coupon rate is the promised rate of interest in the past two years, those rates have fallen significantly. September: 6.125% Source: Treasury Department