Three Places to Find Decent Yields
With short-term interest rates coming down, it's getting tougher and tougher for income investors to find a decent yield.
Where can you go? Here are three ideas.
Certificates of deposit: There are still some bargains out there. This weekend, days after Ben Bernanke slashed interest rates to 4.75%, you could still find bank CDs out there yielding 5.5% or better. Picks include an IndyMac Bancorp (IMB) six-month CD with an annualized yield of 5.7%, a one-year CD from Countrywide Financial (CFC) yielding 5.65%, and a three-year from MetLife Bank (a unit of insurer MetLife (MET) ) yielding 5.35%.
Why haven't they been cut yet in line with other short-term rates? Bankrate.com's Greg McBride says each bank is reluctant to be the first one to cut. And it still makes sense for them to borrow at these levels.
"We haven't seen yields pull back too much," he says. "It's still cheaper for banks to pay 5.5% in a CD than it is for them to go raise funds in the credit markets."
Money invested in a CD is guaranteed by the Federal government up to $100,000. But grab 'em while you can: Once the rates start falling, you probably won't see levels like this again for quite a while.
Municipal bonds: They are as safe as your state and local governments, and right now they are going cheap. Thirty-year munis are yielding around 4.9% right now, or nearly as much as Treasuries -- but in the case of the munis, the income is free of federal income tax.
If you're in a higher-rate income tax bracket, that's a big saving. "The taxable equivalent yields are huge," says Cindy Clemson, municipal bond fund manager at Eaton Vance (EV) . For a top-rate tax payer, "they're somewhere north of 7%." In other words, if you're a top-rate income tax payer, that's what you'd have to earn elsewhere to match this after-tax yield.
Shares: I hate to find the cloud to the silver lining, but the recent Wall Street rally means you're hard-pressed once again to find stocks with good yields. When the share prices go up, yields go down because you're paying more for each dividend.
The yield on the Dow Jones Select Dividend Index (DVY) exchange-traded fund is now just a paltry 3.23%. The S&P 500 overall: less than 2%.
Some of the biggest yields on the stock market are in banking stocks. Bank of America (BAC) is paying 5%, Citigroup (C) 4.5%, Wachovia Bank (WB) 4.9%, and Washington Mutual (WM) 5.8%.
There are obvious reasons for this. The shares are cheap because investors are afraid of more turmoil. Incidentally, Indymac Bancorp's shares are yielding about 9%. That's a lot more even than their CD -- assuming the dividends come through.
Shares, unlike CDs, come with no guarantees at all.
If banking stocks make you edgy, you're not alone. Judy Saryan, equity income manager at Eaton Vance, is treating the sector cautiously despite the tempting payouts. But she insists there are still other good deals out there. Among them: certain big U.S. drug stocks. She won't name names right now because her funds are still buying. But leading suspects have to include Pfizer (PFE) , which is paying an awesome 4.7%, and Bristol-Myers Squibb (BMY) on 3.9%.
Among Saryan's other picks: McDonald's (MCD) , miner Freeport-McMoran (FCX) , European insurers including France's Axa (AXA) , Swiss food giant Nestle and other consumer staple companies. She also still finds opportunities in the energy sector, although it has risen a long way in the past few years.
Saryan says she is looking more for dividend growth these days than for current high yields. Nothing wrong with that, of course, but a few years ago you could find stocks with high current dividends and strong growth. That's getting tougher.
Your best bet may be a dividend fund like Saryan's Eaton Vance Tax Advantaged Dividend Income Fund (EVT). It's currently paying a thumping 6.5%. How? It's a closed-end fund, which you buy and sell on the stock exchange like a regular share.
Right now, the shares are going cheap: They sell for less than the underlying value of the assets. So you're getting $1 worth of dividend-paying stocks for about 89 cents. And the fund uses leverage, borrowing against its holdings to boost returns.