Great news! Interest rates are near record lows. It’s a wonderful time to borrow money.
Need a new car? If your credit is good, zero interest rates are available. Maybe you are in the market for a home. A 30-year Mortgage can be had for as low as 3.13%.
But what if you are starting to save, trying to build assets or planning for retirement. Those same record low interest rates suddenly work against you.
A savings account at most banks pay 0.01% annual interest, unless you are willing to deposit $1,000,000. In that case the rate inches up to 0.8% per year. Clearly that is not a solution.
At this point, unless you have a degree in finance or a rich uncle in Wall Street, you are probably starting to get uneasy. What’s the answer and more importantly, who can be trusted to provide the right answers.
Stockbrokers want to sell stocks. Financial planners are expensive and they take forever to sort through mountains of documents before coming up with complex solutions. You are just looking for unbiased advice on how to cope with a zero interest rate environment.
Here are some guidelines that will allow you to answer this question and help safely build an asset base for retirement or whatever your goal. First, there are numerous sources that pay better interest rates than banks.
If you choose to be super conservative, the United States Government 10 year Note may be for you. That is, if you are happy with an annual rate of 1.9%. That may be better than zero but will it make you financially comfortable?
If not, don’t dismay, you still have choices. The only thing to keep in mind is risk.
Risk and reward go hand in hand. The higher the yield the greater the risk. So it is important to know your risk tolerance. Here are some suggestions on achieving higher income along with peace and serenity.
The first is high yield corporate bonds. It is actually quite easy to acquire a diversified portfolio of bonds yielding as much as 5%. This can be done for very little cost.
We are referring to ETF’s or Electronically Traded Funds. Similar to Mutual Funds, ETF’s contain a diversified portfolio of securities. In this example, it is a group of high yielding corporate bonds. ETF’s are publicly traded, have very low operating expenses and can be acquired through a low cost discount broker.
Here are two examples of High Yield Corporate Bond ETFs:
Guggenheim Bullet Shares 2022 high yield corporate ETF (symbol: BSJM) yield 5%
Global ex USD High Yield Corporate Bond Fund (HYXU) yield 5.3%
A note of caution, these are examples of the highest currently available yields. That means they carry a higher likelihood of being unable to pay regular interest payments.
There are lower yields with fewer risks to choose from. A list can be easily obtained by a Google search. Typically, Corporate Bond ETF yields range from 2.5% to 5.3%.
A second option is a diversified list of dividend paying common stocks. The same rules apply to stocks as bonds. The higher the dividend yield, the greater the risk the dividend might be reduced or eliminated.
We do not own, nor have an interest in any of the securities mentioned so we are completely unbiased. That’s why we can advise that this approach is one we favor for those with a five to 15 year horizon and average tolerance for uncertainty.
Using the common stock dividend approach will result in some sacrifice of yield. The examples below offer a range of 3%-4.26%. We selected this group for a reason.
Each of these companies have outstanding balance sheets, generate huge sums of cash and likely to be in business for many more years. They also offer the opportunity for capital appreciation that could produce total returns above our ETF examples.
High yielding common stocks:
GlaxoSmithKline 4.26%
Consolidated Edison 3.6%
IBM 3.6%
Procter & Gamble 3.2%
Coca Cola 3.1%
