Transcripts

Investment Income Options

JEFF YASTINE: Also in the bond market today, $40 billion in three-year notes were successfully auctioned off in the first leg of this week's massive quarterly refunding. Traders said demand for the notes was stunning. Investors have been gobbling up government debt despite extremely low yields. But as Suzanne Pratt reports, there are other places to look for investment income while the economy recovers.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Courtesy of the Federal Reserve, interest rates are at historic lows. Those low rates flow through to everything from bank accounts to bonds and that means investors searching for yield are having a tough time. So what are the choices? If you are risk averse, you can get a two-year CD for more than 2 percent. Experts recommend avoiding longer-term CDs in favor of waiting for rates to climb higher. Money market accounts currently pay less than 2 percent. They're more liquid than CDs but only those from chartered banks are FDIC insured. Ten-year Treasury bonds pay about 3.5 percent. But, unless you're planning to hold them until maturity, experts say they're a gamble because if inflation heats up, Treasuries will fall in price and in value. That brings us to TIPs, the inflation protected twist on conventional Treasuries. Financial planner Stacy Francis likes them for the next few years.

STACY FRANCIS, FINANCIAL PLANNER, FRANCIS FINANCIAL: With the huge stimulus package that we've seen over the last year, year and a half, that eventually may cause some inflation. Your best protection against inflation when it comes to bonds is TIPs.

PRATT: And then there are municipal bonds. They can be attractive to investors in high tax states. But inflation risk plagues munis, too. Experts advise sticking with short to medium term maturities to reduce that risk. But don't forget equities, particularly dividend paying stocks. While it's harder today to pick good ones, experts say there are solid choices yielding as much as 4 percent. Standard & Poor's posts a list of companies on its website that it says generate enough cash to pay dividends. Still, S&P's Howard Silverblatt says there's a new reality even in the dividend world.

HOWARD SILVERBLATT, SR. INDEX ANALYST, STANDARD & POOR'S: If you're looking for 5 or 6 percent return you're not going to get it. At least if you do get it, you're not going to be able to sleep. You're going to have to set your sights a lot lower and be dealing with the 2, 3 and 4 percent range and accept some risk because there is risk everywhere.

PRATT: It is widely presumed that interest rates will remain very low for the next year. That means income investors are unlikely to find yields north of 4 percent without venturing into riskier products. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.