This alternative to low-paying CDs looks like all risk, no reward
I don't blame anyone for considering any and all alternatives to the ridiculously low interest rates CDs are paying right now.
I myself have gone to drastic measures because 1.8% just isn't going to cut it.
I've started putting more of my nonretirement money in stocks. I've invested more money in my own business. I've even dabbled in day trading.
But if you're going to take more risk with your savings, you've got to demand a worthwhile reward.
That's why I don't see the point in one alternative investment some money managers are pushing on savers -- short-term bond funds.
They're usually referring to short-term funds, which hold bonds that mature in three to five years, or ultra-short funds, which hold bonds with even shorter maturities, although the line between the two can be blurry.
Before you jump in, you really need to consider the yield.
The yield is the amount of dividends or interest they return to shareholders each year divided by the current price of the shares and expressed as a percentage.
We can use that amount to compare the returns of ETFs with other types of investments, such as certificates of deposit.
And the yield on most short-term bond funds aren’t just low, they're pathetically low.
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Take the PIMCO Enhanced Short Maturity Strategy ETF, for example.
(Exchange-traded funds, or ETFs, are a type of mutual fund that can be bought and sold during regular trading hours through a major stock exchange.)
The yield on this short-term bond fund is only 1.18%.
That's less than you can earn with a certificate of deposit in which your principal is federally insured -- a protection you do not enjoy with any bond fund.
Plus, there's an annual charge of 0.35% to cover PIMCO's expenses, which reduces your overall return.
Another highly rated bond fund, PIMCO Short-Term A, pays an even lower yield of 1.04% and charges a front-end load of 2.25%.
That's a commission imposed at the time you buy into a mutual fund. It's taken out of the amount you're investing, making it even harder to earn a reasonable return.
I don't know about you, but I'm not risking my principal for a 1% return -- and paying all sorts of fees and commissions to do it.
As with all bond funds, there's the hope that you'll earn a little something extra in capital gains. But I don't count much on hope these days.
Hope isn't going to make me money; dividends will.
We’ve seen enough crashes and crises in the market in the past decade that nothing is truly safe there. Not even plain boring bond funds.
And the problem with a bond fund, whether it’s an ETF or traditional mutual fund, is that you're still taking on risk. Sure, it might be less risk than with stocks, but it’s still risk.
And if you're going to risk principal, you had damn well better get paid for that risk.
That's why I’ve written off bond funds altogether and still believe that high-dividend-paying, solid blue chip stocks remain the best place to put mid- or even short-term cash these days.
Sure, there's a risk, but at least you can get paid for it.
Verizon remains one of my biggest dividend plays. It pays a whopping 5.09% dividend yield.
I bought into the cell phone company over the course of six months in 2009. Since then, I've earned more than 25% on my money through dividends and capital gains.
I have a stop-loss order in place so that even if the stock were to take a sudden catastrophic nosedive, I'll still walk away with a 20% return.
And there are many good, stable dividend stocks out there. You can earn 3.11% on Proctor & Gamble, 2.84% on the Coca-Cola Company and 5.54% at AT&T.
So when you tell me I can make 1% in a bond fund with my short-term cash, don’t expect me to get too excited.