Investors and consumers seeking high yield income from savings and CD instruments are having a tough time of it right now in this low interest rate environment. As banks are lowering the rates they pay on savings and money markets to next to nothing and as CDs come due from a previous 4-5% yield, investors are left grappling with whether they should take on more risk seeking higher yield, or simply accept lower yields.
As I found out all too well, some banks will offer rates well above the going rate for a teaser period, advertise like hell, then abruptly drop rates weekly as I outlined with my Savings Rate Smackdown article. Conversely, investors lured by seemingly otherworldly investment notes yielding 11% may be left holding the bag if the offering company doesn't overcome near term liquidity problems since they are not FDIC insured.
So, what's an investor to do?
- Highest Yielding Savings and CD Accounts - Interestingly, this Ally Bank review demonstrates what happens when a bank doesn't play nice with competitors. Apparently, their rates are "so high" compared to their peers that it's making them look bad, so they had to file a complaint to Sheila Bair, Chairman of the FDIC. Ally's the first place I look at this time for the highest rates until they're forced to drop them.
- Municipal Bonds - This article on high yield muni bonds and their various investment vehicles provides plenty of options to capture tax-free income with diversified risk in some top performing muni bond ETFs. While the yields are not what they used to be as markets recovered from the abyss, you'll note that my pick for top ETF (of which I'm long) is still yielding close to 8% and it hasn't deviated from the steady payout during the financial meltdown.
- High Yield Bonds - I reviewed the High Yield Bond ETF that I favor and hold currently, which was yielding 12% upon entry, but still yields 10.5%. Now, these high yield ETFs are otherwise known as "junk bond" ETFs and we've seen historically that at the tail end of a recession, junk debt defaults do rise considerably, so the party may not last forever. For a more conservative approach to much larger names with BB ratings and above check out this list of high yield corporate bonds with payouts over 8%.
- High Yield Stocks - There are some great high yield stocks out there. Recently, I compiled this list of high yield large caps with dividend yields over 5% and market caps over $25Billion - and they're not Financials for the most part since most of them had to cut dividend payouts upon receipt of TARP funds. Aside from these well-known names, I highlighted a gem here recently which has had a string of over 20 uninterrupted dividend increases. This 5 year chart vs. the S&P says it all.
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- Income from Stock Options - Generating income from selling puts and calls can be rewarding in a possible sideways market from here, but it's not a strategy for the faint of heart. This article outlining some put and call option basics should provide adequate background to consider if this is right for you.
What are your favorite income generators?
Disclosure: Long PMF and HYG.