Wednesday, May 26, 2010

18 Ways to Earn 5% or More

Due to the poor economy and weak banking industry, most account holders are earning next to nothing from interest on their savings. Many Americans are being forced to find other investment opportunities, however finding a safe investment is much easier said than done. Fortunately, MSN Money.com put together a helpful article with over a dozen tips on earning 5% or more on your savings. I have included a few of their tips below, but you can find the full story here.

Taxable munis

In little more than a year, cities, states and public agencies have issued $100 billion of taxable Build America Bonds (BABs). BABs pay extraordinarily high interest rates because Uncle Sam, as part of the 2009 financial-rescue package, picks up 35% of the issuers' interest costs. BABs now yield more than corporate bonds with similar maturities and credit ratings, making them great not just for IRAs and other tax-deferred accounts, but for taxable accounts as well.

Yields of at least 6% are common for new, long-term BABs. The state of Illinois, for example, just issued 25-year BABs at 6.6%. These are general-obligation bonds, backed by the state's taxing power. Standard & Poor's rates Illinois A-plus, although the state is on watch for a possible rating downgrade. If you prefer to lend to an entity that appears to be in better shape, consider a new, 30-year New York City water-and-sewer revenue bond. The BAB, rated double-A-plus, hit the market at 6.4%.

Fans of exchange-traded funds should consider PowerShares Build America Bond ETF (BAB, news, msgs). With an average credit quality of double-A, it pays dividends once a month and was recently yielding 6.2%.

Preferred stocks

A preferred stock is closer in spirit to a bond than a common stock because a preferred dividend is almost always fixed. So, if long-term interest rates rise, a preferred reacts like a bond and loses value. You also face company risk should the issuer run into trouble and suspend preferred dividends. If you can stand some price fluctuation, consider reinsurer Endurance Specialty Holdings 7.75% Preferred (ENH-A, news, msgs). Rated triple-B-minus, the issue is not callable until 2015 and sports a current yield of 8.1%. Under current federal law, the top tax rate on qualified dividends is just 15%. (Many stocks that look like preferred are actually hybrid securities and aren't eligible for preferential tax treatment.)

Banks, insurers, and real-estate investment trusts are the most common issuers of preferreds. With a preferred-stock ETF, you can diversify into utilities and industrials. The oldest and largest among these is iShares U.S. Preferred Stock Index ETF (PFF, news, msgs). It pays dividends monthly and yields 6.5%.