4 Ways To Make The Most Of Low Interest Rates

By Kristina Zucchi, CFA | February 09, 2010 AAA
4 Ways To Make The Most Of Low Interest Rates

Investing in a low interest rate environment takes much thought and sometimes a little creativity. Placing your money in a savings account, money market or even in a short-term certificate of deposit (CD) will yield you very little to zero after tax return, as banks are unable to offer higher rates since the Fed has left rates so low for so long. However there are some investments that can offer a higher rate of return in this environment.

Before discussing higher-returning instruments, let's take a step back and discuss the impact of inflation on your investments. Your real return is the nominal return (what the instrument says it returns), minus the inflation rate. Currently, inflation is not a worry, but economic theory suggests it may be an issue because the money supply has rapidly increased during this crisis, due to the economic stimulus. Inflation can be staved off by reducing the money supply or raising interest rates (which discourages borrowing and encourages savings). Therefore, investors need to watch for signs of inflation as the following suggested investments may be negatively impacted by the government's attempt to control it (Stocks have long been trumpeted as necessary to ensure a comfortable retirement. But does that advice still make sense? Find out in Stocks: Who Needs Them?! (You, If You Want To Retire).)

Low Interest Rate Investments

  1. High-Yielding Stocks
    High dividend yielding stocks can be very attractive in a low-interest environment. These are typically slower growth companies that throw off a lot of cash and require very little capital for investment. The dividend yield is the dividend per share/ price per share; typically, any company that has a dividend yield higher than 4-5% (which is typically considered the average yield for the S&P 500) is a high-yielding stock. Utilities are generally the prototypical high-yielding stocks, but there are others, as well. In addition to garnering the dividend, investors may also benefit from stock price appreciation, making the total return significantly higher than the 1-2% currently being paid by savings and money market accounts today.

  2. Low-Cost Stocks
    There are also other stocks that may not provide the same attractive yields as Utilities, but do benefit from low interest rate environments, as the cost to borrow is very low. Teleco stocks are an example of an industry sensitive to interest rates because of the need to continually update networks and equipment, so this large capital expenditure type business has a cheaper cost of doing business, which eventually will benefit profits. Utilities also fall into this bucket.

  3. "Safe" Stocks
    If you are a risk adverse investor and the stock market volatility frightens you, then you can buy safe instruments like U.S. treasuries or CDs. A strategy of staggering or laddering these investments, such that you own various maturities at various yields, will provide some protection should the interest rate environment change. That way, you do not have your monies tied up for too long a period of time, and can still achieve the return of a longer maturity instrument.

  4. Real Estate
    Real estate typically is a good investment during low interest rates. This business is influenced by the mortgage rates, which are at a historically low point, thus providing the potential for large returns. However, we have been experiencing an atypical real estate market, and choosing properties prudently is the key to success, especially as prices have yet to stabilize.

Conclusion
Taking advantage of the low interest rate environment to achieve higher returns than what is being offered by banking institutions for the typical savings instruments need not necessarily greatly increase investor's risk. As with all investments, being prudent, doing your homework and making sound judgments with your investments can provide investors with returns that exceed today's rates set by the Fed. (Find out why dipping into your future savings can have serious consequences, in 8 Reasons To Never Borrow From Your 401(k).)

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