Financial Literacy

You Don’t Have to Settle for Low Interest Rates

This is an odd time in financial history. At least 11 countries have negative yields on their 10-year bonds, including Japan, Germany and France.

Investors have poured $17 trillion into negative-yielding bonds.

Think about what that means for a minute. Investors are so worried about rates falling even further that they’re willing to accept a guaranteed loss over 10 years (not to mention the decrease in buying power due to inflation).

Either that or they’re speculating on the Greater Fool Theory – that rates will go lower and someone will buy their negative-yielding bonds at a higher price than they are today.

(Bond prices rise when interest rates fall, and vice versa.)

For the average investor, saver or retiree, none of that matters. All we know is that we’re getting paid bubkes on our savings, which is a real problem, especially for retirees who rely on interest for some of their income.

Here are a few ideas for earning more income despite an ultra-low interest rate environment.

High-Interest Savings Account

The CIBC Bank USA Agility Savings Account pays an impressive 2.05%. This is an online-only account. There are no branches to go into. There are no maintenance fees, but there is a $1,000 minimum.

Money Market Account

Customers Bank has a 2.25% rate, but it has a $25,000 minimum. This is also an online-only account. There are no fees.

BMO Harris Platinum Money Market will pay you 2.2% with a $5,000 minimum. You’ll also get an ATM card. There are no monthly fees, but if your account balance drops below $5,000, you’re back to earning a paltry 0.05%.

Sallie Mae has no account minimum or fees. It yields 2%. This is also an online-only account. You are limited to six withdrawals per month.

Checking Account

Simple, which offers online-only checking, offers 2.02% with no account minimum. Accounts that are $10,000 or larger earn 2.15%.

Other Ideas

Peer-to-Peer Lending – I wrote about peer-to-peer lending in my book You Don’t Have to Drive an Uber in Retirement.

Sites like LendingTree and Prosper allow you to act as the bank and lend money to borrowers who are consolidating debt, improving their homes or pursuing other goals. The lower the borrower’s credit rating, the higher the interest you’ll earn.

I had been earning more than 6% on my portfolio for several years. This year, my return is down to 3.3% after a few defaults, and I stopped reinvesting the interest payments into new loans.

Once I halted automatic reinvestment, the cash that was paid to me as interest earned nothing and brought down the return of the portfolio.

Keep in mind that there is risk that the loans won’t be paid back. But if you have a portfolio of a few dozen loans (they can be as small as $25 each) that aren’t made to the lowest-rated borrowers, you should be fine.

Selling Covered Calls – This is a great strategy to generate extra income from a stock. You can buy a conservative stock with a decent yield like AT&T (NYSE: T), which pays 5.5% annually.

If you sell a covered call, you are selling an option that gives the buyer the right to buy your AT&T shares at a specific price by a certain time.

Now, AT&T is trading around $37. You can sell the January $38 calls for $1.05.

That means you will collect $1.05 per share, or $105 (options are sold in 100-share contracts).

If AT&T rises above $38, the buyer of the option can purchase your stock at any time before the third Friday in January (options typically expire on the third Friday of the month) for $38.

If AT&T is below $38 on that day, you’ll keep the $105. And you’ll collect the dividend while you’re waiting.

There are two risks with this approach…

One is opportunity risk. If AT&T is trading at $45, you will still have to sell your stock at $38 (unless you buy the option back for a loss).

However, you bought it at $37 and made an additional $1.05. Plus, you collected a $0.51 per share dividend, so you still made 6.9% in three months.

AT&T could also go lower, in which case you would lose money on the stock, though the $1.05 per share from the option and dividends would help buffer the loss.

In a bull market, selling covered calls is a great way to generate extra income – as long as you can handle the possibility that your stocks could go down.

Low interest rates are likely here to stay. The president is putting pressure on the Fed to send them even lower.

But you don’t have to settle for the ultra-low rates. You can take steps to earn extra income or yield. You just have to be flexible and willing to move money around.

Good investing,

Marc


About

A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.

 

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