Manny Schiffres offers his advice on where to invest to get high yields after the Fed cut interest rates.
Kevin McCormally: I'm Kevin McCormally of Kiplinger’s and I’m here with Manny Schiffres, the investment editor of Kiplinger’s Personal Finance Magazine to talk about yield investing. Manny, where do investors go today to get the best yields on their investments? Manny Schiffres: Well, as always Kevin, it depends on how much risk you are willing to accept. Kevin McCormally: Okay. Let’s say I'm sort of a coward. I don’t want to take any risk at all. Manny Schiffres: Well, the obvious choice is a money market fund. You can get about 5% from the best yielding money market funds nowadays and there’s virtually no risk that you can lose principal. The problem in money market funds is that the yields tend to correlate closely with what the Federal Reserve Board is doing and right now, the fed is in a rate cutting mode in an effort to stave off recession. So that means that some months from now, you’ll be receiving less than 5%. You won't lose any money. It just means you’re getting less interest. Kevin McCormally: Is there any way to avoid the threat? Manny Schiffres: Well, one thing you could do is invest in a one-year CD for example. If you’re willing to shop around, the best interest rates you can get now for one-year CDs are about 5.5%; that’s not bad. And by the time the CD matures, the fed probably will have finished its rate cutting and may have actually reversed course and begun raising interest rates, so you can reinvest at a better yield. Kevin McCormally: Manny, let’s say I want more than 5.5% today. Where can it go? Manny Schiffres: I'll give you an example. If you want to take a little bit more risk, you can invest in a BBB corporate bond yielding about 6.2% or 6.3%. The BBB is the lowest rating among investment quality bonds. You could get more than 7% by investing in junk bonds. But we’re not recommending that given the uncertainties of the economy, particularly concerns that we may be on the verge of recession. Kevin McCormally: You had to say that I want to avoid junk bonds, but I also want even higher rates. I'm a yield hog. Where can I go? Manny Schiffres: Well, yield hogs will have to take even more risks. I'll give you a couple of examples. You could invest in a closed-end fund that invests in floating rate bank loans. That’s one possibility. Kevin McCormally: What kind of return will I get there? Manny Schiffres: Well, 7.5% perhaps. The reason you’d get that return is the fund is leveraged, so it adds to the risk. You can invest in a business development company like Allied Capital. Business development companies lend money to middling quality companies at high rates of interest. Kevin McCormally: Again, what kind of yield can I find for this? Manny Schiffres: 8% or 9% there. Kevin McCormally: 8% or 9%? Manny Schiffres: Right and similarly, you can get the same math from an energy royalty trust like the San Juan Basin trust. These companies basically pay out the profits from selling a barrel of oil or a certain amount of natural gas. The problem there is that these stocks like instruments will tumble if the price of oil or gas falls. Kevin McCormally: Okay. Thank you, Manny.