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).)

Related Articles
  1. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  2. Home & Auto

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  3. Home & Auto

    Understanding Pre-Qualification Vs. Pre-Approval

    Contrary to popular belief, being pre-qualified for a mortgage doesn’t mean you’re pre-approved for a home loan.
  4. Home & Auto

    6 Reasons To Avoid Private Mortgage Insurance

    Homebuyers who put less than 20% down will likely be forced to secure private mortgage insurance. Here are six reasons to avoid it.
  5. Home & Auto

    10 Tips for Getting a Fair Price on a Home

    When the housing market booms, it's tougher than ever to get a good price. Make sure the house you choose is worth the price you pay.
  6. Home & Auto

    Steps To Buying A Home

    No matter what type of property you’re eyeing, there are steps you can take to protect your investment.
  7. Home & Auto

    How an Interest Rate Rise Affects Your Mortgage

    A look at what makes home-related loans move the way they do. The surprise: Mortgage rates don't necessarily follow interest rates.
  8. Home & Auto

    Understanding Private Mortgage Insurance

    Private mortgage insurance, or PMI, protects lenders against loss if a borrower defaults.
  9. Term

    How Points Relate to Financial Instruments

    Points usually refer to the measurement of some change in a financial instrument’s value.
  10. Credit & Loans

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
RELATED FAQS
  1. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  2. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  3. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  4. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  5. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  6. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center