7 Alternatives to High-Yield Savings Accounts
With banks paying historically low rates, savers have other options. Here are 7 alternatives to high yield savings accounts.
Let’s be honest, yields on totally safe savings accounts are pathetically low. Typical savings accounts and money markets pay no more than a fraction of 1%. Even so-called high yield savings accounts rarely pay much more than 1%. But here are seven alternatives to high yield savings accounts.
Before we go into the list, understand that these alternatives are not completely safe. There is some risk of loss of principle, and there’s at least a small chance of default. And in some cases, you’ll also have to tie your money up longer to get a higher yield. But if it’s a choice between earning less than the rate of inflation, and earning a few points more, it may be worth the risk.
1.High Yield Bonds
These are bonds issued by corporations. The typically pay higher yields than certificates of deposit (CDs) or U.S. Treasury securities, because they carry higher risk. But there are some top-rated companies issuing high yield bonds that seem relatively safe.
If you don’t like buying bonds from individual companies, you can always invest in a mutual fund or an exchange traded fund (ETF) that holds high yield bonds. That will lower the risk of loss on the failure of any individual issue.
The returns on these securities can be impressive. Money/US News has a list of 17 high yield bond funds. As an example from the list, iShares 0-5 Year High Yield Corp Bd ETF has a one year return of 5.18%.
2. Dividend Paying Stocks
Many large, well established companies pay dividends on their stocks. And while the current bull market has most investors chasing after price growth, some stocks offer healthy dividends. NASDAQ.com has a list of dividend paying stocks, and there are scores that pay over 5%.
One of the advantages with dividend paying stocks is the potential for capital appreciation. While you’re earning a solid dividend yield, the value of the underlying stock(s) can also rise, providing you with a double-edged gain.
3. Preferred Stocks
Preferred stocks have similar benefits to dividend paying stocks. You can get a strong dividend return, plus the potential for capital appreciation. The major advantage with preferred stocks is that they are a more secure investment than common stocks. For example, should the company declare bankruptcy, preferred stock would be paid ahead of common stock.
The website Dividend.com has a long list of preferred stocks that yield in excess of 5%.
4. US Treasury Notes
U.S. Treasury notes are an investment in U.S. government debt. That makes them the safest of all securities. There’s virtually no chance of the issuer going into default, and you’ll always get your investment principal back if the securities are held until maturity.
US Treasury Notes have maturities ranging from two years to 10 years. They can be purchased in denominations as low as $100, and pay interest every six months.
2-year notes currently pay 2.21%. 5-year notes pay 2.63%.
5. Municipal Bonds
Municipal bonds are debt securities issued by state, county and municipal governments, and their agencies. The biggest attraction is that they are tax free for Federal income tax purposes. But they’re also tax free if you are a resident of the state from which they are issued. This gives them a double tax-free benefit. The best strategy is to purchase these bonds in your state of residence.
The tax benefit is no small advantage. If you are in a combined Federal and state tax bracket of 30%, a 3.5% yield effectively becomes 5.0%. But it also means that these bonds should not be held in a tax-sheltered retirement plan. Since such accounts are already tax deferred, the tax benefit of municipal bonds would be lost.
But even apart from the tax benefit, municipal bonds provide a healthy return. Morningstar reports that the average annual return on municipal bond funds is 3.51% over the past five years. You can invest in individual bonds in your state, or you can invest in a municipal bond fund. The funds can also be state specific.
6. Peer-to-Peer (P2P) Lending
The number of P2P lending platforms has grown in recent years, and for good reason. The yields on P2P investing is much better than what you can get in traditional super-safe investments. P2P lending is basically being on the investor side of banking. You are providing the funds that borrowers are using for loans. Since there is no bank in the middle, you get the higher returns.
For example, P2P giant Lending Club advertises average returns of 4% to 6% per year, and I’ve heard of some investors doing much better.
There’s the risk of default by borrowers, but returns are net of those losses. P2P investing can be used to increase the overall return on your fixed income assets by holding a portion of that portfolio in these securities.
Another P2P platform you should look into is, Prosper.
7. Longer Term Certificates of Deposit
CDs are a way to preserve absolute safety in your interest-bearing investments. They offer higher yields than high yield savings accounts, with the limitation that you’ll tie your money up for a longer term. But if you have no immediate use for the funds, it could be well worth the wait.
For example, Ally Bank currently pays 1.45% APY on high yield savings. But they pay 2.50% APY on their five-year CD. You’ll be increasing your yield by more than a full percentage point by going with the five-year CD. Note that these rates are subject to change.
Do you know of any other alternatives to high yield savings accounts? Let us know in the comments.