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This instablog post is sponsored by Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on Seeking Alpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service now nearly 10,000 active subscribers and can be had HERE for the rock bottom price of $49 (It usually is $99) for the first year. Tim provides a solid selection of lower beta, high yield recommendations for these challenging times.
It does not take much strength to do things, but it requires a great deal of strength to decide what to do.”― Elbert Hubbard
By Tim Plaehn,
Those of us out in the real world, buying gasoline, bacon, Christmas gifts, and renting homes, understand that inflation is real and probably higher than the official government inflation number.
However, interest rates on fixed-income investments such as Treasury bonds and CDs remain very low.
One exception is the U.S. government’s inflation-linked savings bonds, which currently pay over 7%. And that rate will go higher if the rate of inflation goes even higher.
Specifically, I have the Series I Savings Bonds in mind. They currently yield 7.12%, and are the exception and an alternative to low-interest rates.
You purchase Series I Bonds through an account on the Treasury Direct website. Here are the features of I Savings Bonds:
- Minimum purchase: $25. Maximum: $10,000 per year.
- The rate you earn is a combination of a fixed rate and an inflation rate.
- The fixed rate stays the same for the life of the bond.
- The inflation rate resets every six months on May 1 and November 1.
- The rate on your bond changes every six months from the date of purchase. For example, if you bought an I Bond on December 15, the rate on that bond would change on June 1. See table below.
- Interest compounds every six months.
- Savings Bond interest is exempt from state income tax.
Here are some factors to consider before investing in Series I Savings Bonds.
- You cannot redeem a bond for at least 12 months after purchase.
- If you redeem a bond before five years, you will be charged a penalty equal to three months of interest.
- Interest only compounds to the bond’s value. You cannot have the interest paid out as earned.
- If the official inflation rate declines, the interest rate on your bonds will decrease.
- The current fixed rate portion of the rate is 0.0%. Hypothetically, there could be periods where your bonds earn 0% interest. Probably a good time to take that three-month interest penalty.
- The $10,000 per year purchase cap limits how much of the I Bonds high interest rate money you can earn.
In conclusion, Series I Savings Bonds offer a safe, high-yield hedge against inflation at the current level, or even higher. These bonds would make great gifts for someone you want to help save money. But be aware: Series I Bonds tie up your money and reinvestment is the only option for earned interest.
We all make choices, but in the end our choices make us.”― Ken Levine
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Thank You & Happy Hunting,
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