Do you own a CD or US Government Bond?

If you own a CD or US government bond you likely know the interest earned rates are low. The best CD rates I can find today are from 1.25% to 2.42% for a one year or five year CD. US bond rates are from .22% to 4.35% for a one year to 30 year bond. If you own any of these interest bearing vehicles I expect you are not happy, but at least believe you are safe. Well I have some sad news for you, not only are you not safe, but you are actually losing money. Official inflation rate via the CPI as reported by the US Government is 2.7%. So unless you are willing to tie up your money and the inflation risk it involved over 30 years you are actually losing money on your interest bearing account. Next the CPI does not include groceries and gas, and of course if you happen to be in the market for either of those goods you know the prices there are a whole lot more than going up just 2.7%.

Now I know the first thing most of you are going to say is at least it is safe and I will always get back my principal. Well if inflation is 2.7% and more you are not only not making money you are losing principal via lost purchasing power each and every day. So what is a saver or investor to do? Frankly I do not know since only you can decide your tolerance for risk and volatility. What I do know is the Federal Reserve is most determined via Quantitative Easing, which is massive increases in money supply, to force you to buy some other asset. Other assets the Fed has in mind is real estate, stocks, commodities, and anything where they deem the necessity to inflate asset prices. See the Fed is using their printing press to keep up and push up asset prices to make people feel richer. They also are trying to support the weak housing market by forcing mortgage rates down and stabilize prices so you will want to go buy a home. The Fed is hoping if you feel richer you will go buy a car, appliance, or something to keep the economy up and add some jobs.

The Fed and US Government is in cahoots here since the current administration is spending money via the federal deficit to support what the Fed is doing. The government also has a vested interest here as they want low rates to finance the massive borrowing. Imagine the interest costs if the borrowing rate just doubled from .22% to .44%. Frightening huh?

So again what is a investor to do? You can buy stocks that pay dividends. There are numerous large cap stocks that pay 5% or better. Many of these are utilities who are solid stable companies that are not going anywhere. Duke Power (DUK) and Southern Company (SO) are two that come to mind. You can also invest in real estate. A home loan for 15 years is right now below 4% and just a few years from now that will basically be the inflation rate going forward. So it is for my purposes free money. There are also preferred stocks in many of these utilities, but also banks, which are all but guaranteed to pay a dividend and being preferred you are the first to get paid if something does go wrong. I like a ETF for preferred stocks, symbol PFF. Master Limited Partnerships are another choice. These pay upwards of 6% and are tax favored as you basically pay no tax until you sell the security. There are some tax issues here when preparing your return, but if you need income these are virtually as safe as can be. OKS, KMP, and EPD are three that come to mind. Lastly, I favor municipal bonds. Right now you can buy investment grade muni bonds paying 5% plus and if you buy them in the state you live they are totally tax free. Muni bonds are issued by state governments and are also deemed extremely safe.

So next time you consider renewing a CD at a low rate, or buy a government bond at almost no interest, consider other alternatives. This by no means suggests you put everything you own in stocks or other assets. Wise saving and investing says keep some cash, but enhance your returns by diversifying your assets and make some real interest.