Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Help! My CD is Maturing and I Refuse to Settle for 0.29%!

Our readers love letting us know what's on their minds. This popular question was submitted to me by one of our Forever Stocks investment advisory subscribers.

Alice M. from San Antonio, Texas asks Forever Stocks

Q: My CD is expiring. I'm only getting 0.29%, so I'm thinking about switching into a safe-but-non-FDIC-insured product to get a higher yield. What other options do I have that would be safe?

A: Thanks for your question, Alice. This question has become more and more common as people become impatient with next-to-nothing interest payments from their savings accounts and CDs. According to Bankrate.com, the average 1-year CD yields a ho-hum 0.69% APY and the average 6-month CD yields a paltry 0.22% APY.

Fortunately, there are a number of safe options that can generate much higher interest income than a CD. It just all depends on how soon you'll need access to your invested money.

Bank CD Alternative #1: High-Interest Bank Accounts

For short time horizons -- less than a year -- you can visit Bankrate.com. The site allows you to search for the highest yielding money market accounts, savings accounts and CDs offered in your area or nationwide. A search for 1-year CDs shows banks offering rates up to 1.15% APY. 

For an even shorter term -- weeks or months -- a money market account may be a better choice. Money market accounts allow you to freely withdraw your money at any time while still earning up to 0.91% APY.

Bank CD Alternative #2: Short-Term bond Funds

For readers with investment horizons shorter than three to five years, short-term bond mutual funds with low expense fees (look for annual fees under 0.6%) can also be a great alternative to a bank CD.

The T. Rowe Price Short Term Bond Fund (NYSE: PRWBX) is popular around the InvestingAnswers office. It invests in a mix of safe corporate bonds (with an average AA credit rating), government bonds, mortgage bonds, and asset backed securities, among other sectors. The bonds held within the fund have an average maturity of less than two years -- making PRWBX much safer than a long-term bond fund that would face a significant price decline if long-term interest rates start going up.

PRWBX has a minimum investment requirement of $2,500 but offers an attractive yield of 2.20% (minus the expense fee of 0.54%, which is below average). It has been expertly managed by fund manager Ted Wiese for the past 15 years. 

Bonus: There's no withdrawal penalty, which makes it easy to access your money as soon as you need it.

Bank CD Alternative #3: I-Bonds

Another viable option -- and one that's a bit outside the box -- is the I-Bond. Issued and backed by the U.S. government, this type of bond is designed to keep pace with inflation, so it adjusts its interest rate every six months as inflation fluctuates.

Every dollar you invest in an I-Bond is also tax-deferred (like an IRA contribution), meaning you're only taxed on earned interest after you redeem it.

Currently, the I-Bond pays 3.06% APY, but as always, there is a catch. You must hold the I-Bond for at least one year, without exception. And if you redeem an I-Bond within five years, you must forfeit your last three months of interest -- causing your actual yield to drop slightly to 2.7% in the year you incur the penalty.

You can purchase I-Bonds commission free in $25 increments at TreasuryDirect.gov up to $10,000 per person. The bonds are then sent electronically into your designated account.

Bank CD Alternative #4: Ultra-Safe Stocks That Pay Big Dividends

Many investors -- especially the most risk-averse ones -- fear putting their money in stocks for the short term, quite understandably. But there are a few exceptions that offer a safe and reliable dividend yield -- sometimes up to a whopping 5%. 

In my recent article, Forget 1% CDs -- This Alternative Pays Four Times More, I outlined Automatic Data Processing (NASDAQ: ADP), which carries a AAA-credit rating and has a lower risk of default than the U.S. government. The stock currently pays a 2.87% yield, but that yield is very likely to grow to over 5% in the next few years, thanks to the company's annual tradition of raising its dividend. 

[Note: My research team and I recently analyzed a safe stock that has raised its dividend 700% over the past 10 years. If this industry-leader keeps raising its dividend at that pace -- which it could easily afford to do -- its dividend yield could grow from its robust 4.60% to an eye-popping 18.9% for investors who buy the stock today. If you want to learn more about this "forever" stock and four others, I invite you to watch this presentation.]

The best feature of safe stocks that pay a dividend? Unlike a CD, in which you have to lock up your money for a fixed period of time, stocks are liquid, so you can cash in your shares at any time.

The Investing Answer: As usual, try to strike a balance between liquidity and interest yield in any investment you choose. Tying up your cash in a 5-year CD for 1.80% APY may not be worth it when you consider a much more liquid 1-year CD has an interest rate nearly as high at the 5-year -- up to 1.15% APY.

If your time horizon is longer than three years, you may see interest rates rise before you need access to your money -- so stick to terms shorter than that if you want to have cash freed up to take advantage of safe investments with higher interest rates in the future.

Happy Investing!