CD Rates

GLOSSARY:

• CD rates
• Interest rates
• Stock
• Dividend

More Terms

RELATED LINKS:

• Earn 3% or more a year with these dividend-paying stocks
• Higher international bond fund yields could boost your income
• How do I calculate the gain or loss on stocks?
• 5 smart moves to build a stock portfolio
• Emerging market bond funds are risky but boast yields of 4% to 9%

If record-low CD rates have you looking elsewhere for higher returns, dividend-paying stocks are worth considering.

At a time when we're lucky to earn 1.5% on certificates of deposit, many well-regarded companies are paying 3% to 6% a year in dividends.

The dividend yield is the total amount paid each year in cash dividends divided by the current price of the shares.

It's the income-generating potential of a company and much like the interest you earn from a CD.

Dividends are typically paid out quarterly. So if the stock pays a $2 dividend, you'll receive four payments per year of 50 cents for each share you own.

It might not sound like a lot, but it can add up over time. And for many of these companies it's a far higher yield than you'll earn in a CD nowadays.

Of course, the big drawback is that the money you invest in stock isn't FDIC-insured like it is when you put it in a bank.

The value of your shares can go down, and we don't have to tell you how volatile the equity markets are. For all you know, the stock market could take a 5% nosedive next week and the value of your stock could go with it.

But you can minimize the risk, and anxiety, by considering the beta value of the shares before you buy.

It's a common measurement of how volatile a stock is compared to the overall market.

A beta below 1 indicates that a stock's price moves less than the market average, while anything above 1 indicates the stock moves more than the market average.

It means the smartest place to put your money is in companies that have a long record of paying substantial dividends and a beta lower than 1.

They're not hard to find. Here are a few of the blue chip stocks in the Dow Jones Industrial Average you might want to consider:

• Verizon, the communications giant, is paying a whopping 5.31% dividend yield and a beta of 0.56.
• The Coca-Cola Co. pays a more moderate 2.79% dividend but with an even lower beta of 0.53.
• ExxonMobil Corp. is the world's largest oil company with a dividend yield of 2.25% and a beta of 0.51.
• Procter & Gamble, a huge maker of everything from laundry detergent to pet food, offers a dividend yield of 3.33% with the lowest beta of the bunch at 0.43.

Other possible picks include AT&T (with a dividend yield of 6.38%), Merck (4.35%), Pfizer (4.148%), Intel (3.18%) and General Mills (3.06%).

You're probably wondering about Apple, the extraordinarily innovative maker of iPads and iPhones?

Well, its shares reached a new all-time high of more than $458 a share this month, but Apple doesn't pay dividends.

So investors looking to generate cash have to scratch it, and all other stocks that don't pay dividends, off their lists.

Be aware that share price and dividend yields move in opposite directions. So, as share price increases, the dividend yield will generally decrease.

Dividends are set in dollar amounts, so their amount won't change, just the percentage you're earning.

Dividend amounts themselves can be cut by management at anytime. But solid payers such as the companies mentioned here
have decades-long records of increasing dividends.

You'll still come out a winner if share price increases and dividend yield decreases because you'll be earning money in capital gains when you sell.

Investing in shares with high dividend yields also provides some protection against falling share prices.

Let's say you invested in AT&T and the stock price fell 2% over the next year. You'd still come out ahead because of the 6.38% dividend you were paid.

In fact, you'd still out-earn the return on any CD you can buy.

Even if those shares decline in value, you don't actually lose money until you sell them for a loss.

Pursuing this strategy doesn't require you to lock up your principal for 30 years, but you should expect to hold onto these shares for at least the next few years.

Remember that there is no such thing as a "risk-free" stock. All stocks can decline in value, and past performance is never an indicator of future expectations.

But the good dividend payers mentioned above have a history of being more stable and less risky than most other stocks.

You have to ask yourself if it's worth taking a risk of losing a little principal if you can earn 5% on your money when your only safe option is 1.5% in a CD.

You can also potentially grow your earnings further by reinvesting the dividends.

Instead of being returned to you, the dividends are used to purchase more shares. And because those new shares can also earn dividends, it allows your money to compound just as it would with interest on a CD.

With the Federal Reserve determined to keep interest rates at record lows until at least late 2014, it will be years before CDs or money market accounts are paying reasonable returns again.

If you take the plunge, we suspect you'll be thrilled to hold onto those dividend-paying shares -- and keep collecting your quarterly checks -- for the foreseeable future.

You can follow Interest.com on Twitter and Facebook.