Bye CDs – Well Hello There Dividends

   

Bye CDs – Well Hello There DividendsIt’s no surprise that CD rates are super low and have been for a long time now. Per Bankrate.com, the best rates for a $10,000 5 year CD is 2.35%. I’ve seen so many stocks that have a higher yield. So if you’re looking for a little passive income, don’t look at CDs so much, but alternatively at dividend stocks.  Dividend stocks are generally offered by companies whom have been around for many years, so they take their profits and pay them back to the shareholders. Established companies offer these more because they have reached a level of maturity in their business. And because of this maturity, product identification, customer base, they are able to offer dividends.

 

Maybe the Fed Can Help, Maybe Not

 

If the Federal Reserve starts the process of regularly raising the federal funds rate, this can help boost CD rates. But as this has not been happening, it is yet another reason to leave CDs in the dust and look elsewhere for higher returns. But even if the Fed begins rate hikes on a more regular basis, this won’t necessarily make CD rates jump right away. Per Nerd Wallet, “Fed rate hikes don’t cause bank rates to skyrocket overnight, but they can encourage financial institutions to gradually increase their APYs.” It goes on to say that banks in the past have raise loan rates instead of CD rates following a rate hike.

 

This chart I pulled from retirementincome.net shows the steady increase in dividend income VS CD interest income for a 40 year period – click to enlarge:

Dividend income

 

High Yield Dividend Funds

Instead of dividend stocks, I’ll present dividend funds or ETFs rather. This is because you automatically get diversification too with these. Per http://www.dividend.com/dividend-etfs/, a few of these include:

  • CVY – multi-asset income ETF with a yield of 4.4% and has been paying a divided for more than 10 years.
  • DHS – market cap of over $1B with a yield of 3.07% and has been paying a divided for more than 10 years.
  • PGF – market cap of over $1.5B with a yield of 5.6% and has been paying a divided for more than 10 years.

Ofcourse there are many other high yielding divided ETFs to choose from and other factors/variables to consider. By the way, I don’t own any of these. Do as I say, not as I do….just kidding J One more to add is:

  • PFF – market cap of over $18B, with a yield of 5.62% and has been paying a dividend for about 10 years.

 

 

Is It Safer? No, But Hey No Risk No Reward

 

Since you may get a higher return, dividend funds do come with a bit more risk. The risks of high dividend stocks and funds include:

 

  • Cut in dividend, which means less income for you and possible decline in stock price as well. That doesn’t happen too often though unless we are in an economic crisis. These days more and more companies are actually raising their dividends.
  • Pressure to continuously raise interest rates which can result in money coming out of dividend stocks and falling stock prices.
  • Nature of investment – dividends do not have to be paid, so a company can essentially cut or eliminate dividends. This is not the case with CD interest income.
  • Depends what you buy – check out XLU – utility ETF that has a yield of 3.26%. Compared with the SPY index for the overall market, it has not done well (SPY up by ~10% in comparison). Click to enlarge chart:

 

SPDR ETF

 

More Money = More Taxes

 

Yes with dividend income you pay taxes. But remember paying taxes is good because it means you’re earning income. Depending on your income, you can pay either 0 or up to 20% tax on qualified dividends. One way to strategize in a way to reduce your tax liability is to own high dividend paying stocks in tax-deferred accounts. As these continue to grow and reinvest, so will the amount of the dividends and that is when you can really benefit from the tax shelter in tax-deferred accounts in the short-term at least. These are usually 401(k) plans and IRAs. Motley Fool further explains that by eliminating the tax liability on these accounts, it can help your portfolio grow uninterrupted with dividend reinvestment and long-term gains. But it’s also a good idea to have some dividend paying stocks in after-tax accounts. You don’t want to pay a lot of taxes when withdrawing your retirement funds do you? A company you own may also pay a stock dividend which is just a payment in the form of more stock from that company instead of a cash dividend. But you don’t have to pay taxes on these stock dividends until the stock is sold.

 

So do you have funds in a CD set to expire and are pondering where to deploy? Could a dividend stock or fund be a viable option? Got any good ones in mind you’d like to share?

 

 

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I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!

 

Simple Money Man (SMM)

4 Comments

  1. I personally don’t have any CDs in my portfolio. If I did have one expiring I would be tempted to pick up some of the water utility stocks that have recently gotten dragged down. They are huge moats (pun intended) and are wonderful dividend payers. So I think I’d rather get some dividends that way than some of the alternatives available with CDs.

    • I had a savings CD for my son that recently expired. I need to have a conversation with my wife in terms of what we should do with his funds. He already has a 529 plan. This is just birthday money he’s collected over the years. Maybe a MOAT with a nice divided is just what the doctor ordered 🙂

  2. Can’t beat just buying the good old fashioned dividend stocks and making your own portfolio. Get to choose what you want to invest in and what price for the most part. Gives you a little pride when it’s all said and done, that you are the one that made it. Basically like making your own fund.

    • True, I’ve dabbled in that too. Individual stocks offer higher dividends. Of course they come with more risk than a fund. But these days it’s so easy to buy and sell and it also motivates you to learn more about the specific company you’re invested in and see what they are up to 🙂

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