INVESTING
Where to get decent returns at low risk
Risk is out of the question in this economy. But the safest investments deliver almost nothing — especially now when interest rates are at record lows.
So how do you squeeze out a decent return and still sleep soundly?
Certificates of deposit
One way is to replace low-yielding money- market accounts with certificates of deposit. You’ll earn more interest, and if you choose a bank CD backed by the Federal Deposit Insurance Corp., your investment will be insured.
The downside is that your money is tied up for the term of the CD, typically from three months to five years.
But you can keep your CD investments somewhat more liquid by building what is known as a “ladder.” Start by putting equal amounts into CDs with different maturities. As the first CD matures, reinvest the money into a new CD with your longest chosen time horizon. That way, you will regularly unlock a portion of your money while the balance is parked in something that yields more than the shortest-term instruments.
Ginnie Mae bonds
If you’re prepared for a little edgier investment, consider Ginnie Mae bonds, financial experts said. These are bonds guaranteed by the Government National Mortgage Association and made up of repackaged home loans insured by government agencies such as the Federal Housing Administration. Yes, they’re tied to mortgages, and yes, they conjure up thoughts of woebegone Fannie Mae and Freddie Mac. But unlike Fannie Mae and Freddie Mac bonds, securities insured by Ginnie Mae have always had the explicit backing of the federal government.
The easiest way into Ginnie Maes is through a mutual fund that specializes in them, such as the Vanguard GNMA Fund, currently yielding 4.96 percent, or the Fidelity Ginnie Mae Fund, yielding 4.85 percent.
“Ginnie Maes would probably be the safest option after a straight Treasury bond,” said John Coumarianos, a mutual fund analyst for Morningstar. “The only risk you really face with them is prepayment because they are mortgages.” When home loans are paid off early, that curbs the interest payments to bonds that are backed by the mortgages.
Corporate bonds
If you’re still hungry for higher yield and ready for another dimension of risk, check out corporate bonds. Their yields have surged to unprecedented levels, but default rates also are rising, which means you’re best off sticking to companies with high credit ratings and stable balance sheets, said financial adviser Frank Ruffing, of Farragut Resources in McLean, Va.
AT&T, Hewlett-Packard and American Express bonds are among the issues offering rich yields for the risk of holding them, he said.
“If an American Express five-year note is going to pay me 7.75 percent on my money until July 2013, sure that’s risky — anything can happen in five years. But for it to really be dangerous, you would have to see AmEx get $22.5 billion of market capitalization erased before they got to your principal,” he said.
Ruffing is steering clients to the Barclays iShares iBoxx Investment Grade Corporate Bond Fund, an exchange-traded fund. It holds about 100 high-grade bond issues with an average coupon of about 7 percent.
Preferred stocks
If you’re comfortable with corporate securities, another area to consider is preferred stocks. They rank below bonds in safety, but they get priority over common stock when it comes to dividend payouts or, in the case of bankruptcy, the distribution of assets.
Grubb & Ellis AGA launched a no-load fund this summer that focuses on preferred shares in real estate investment trusts, or REITS, which are yielding an average of about 13.5 percent. Favorites of Jay Leupp, senior portfolio manager for the Grubb & Ellis AGA Realty Income Fund, include preferred issues from Public Storage, Vornado and mall operator Taubman Centers.
“Compared with banks and utilities, you’ve got hard, tangible assets that make up 80 percent to 90 percent of a REIT’s balance sheet, so you’ve got assets that can be liquidated if the company does get into trouble,” Leupp said.
You can buy individual preferred stocks, but a fund will give you good diversity and maybe even some extra yield generated through arbitrage, which is when anomalies in the valuation of similar but separate issues can be exploited for a profit.
Either way, focus on higher-quality names, and hold them in a tax-deferred account because REIT preferreds are treated as current income, Leupp said.
Log into MyBuffalo to post a comment
MyBuffalo is the new social network from Buffalo.com. Your MyBuffalo account lets you comment on and rate stories at buffalonews.com. You can also head over to mybuffalo.com to share your blog posts, stories, photos, and videos with the community. Join now or learn more.
Reader comments