If you're among the millions of worried Americans trying to keep your money safe in a savings or money market account, sorry. You're in trouble, too.
The $4 trillion Americans have tucked into money market funds earns virtually nothing in interest. Savings accounts and certificates of deposit aren't much better. A five-year CD might pay almost 3%, but will that even outpace inflation?
And this won't change anytime soon, because the Federal Reserve has made clear it will keep short-term interest rates near zero until employment and the economy really start to improve.
Typically, the Fed hasn't raised the federal funds rate -- a key interbank borrowing rate that it controls -- for two and a half to three years after the end of a recession, St. Louis Fed President James Bullard reminded us all in a recent speech. Other rates tend to follow the federal funds rate.
That's a long time to earn virtually nothing. So here's my guide to earning anywhere from 6% to 15% on your money, albeit with a little more risk.
High-yield dividend stocks
Despite the 60%-plus advance in the market since March, there are still plenty of stocks that pay hefty dividends, which are regular payments to shareholders per share of stocks. I looked for dividend yields of 6% or more. That means, for example, a $100 investment would earn $6 in dividends annually.One way to smack down lousy returns is through shares of World Wrestling Entertainment (WWE, news, msgs), which boasts a dividend yield of 8.9%.
The share price has recently advanced sharply to about $16 from $13.50, so it could be in for a pause. But the stock looks relatively safe -- a key to income stocks -- with the company projecting earnings to grow 15% to 20% a year for the next five years.
There's still room to find more wrestling fans in places such as India, China and Latin America. And analysts expect a new deal with video-game-maker THQ (THQI, news, msgs) soon. Plus, even in depths of the market washout, WWE's shares never dipped much below $10.
To find other relatively safe income plays, I turned to a few value investors who have good ratings as advisers in the past:
Altria Group (MO, news, msgs), 7% yield: Kelley Wright, the editor of the Investment Quality Trends newsletter and author of the upcoming book "Dividends Still Don't Lie," likes financially sound companies that have a long history of raising their dividends. He looks to buy when dividend yields are historically high -- another way of saying the stocks look cheap.
One he likes now is cigarette giant Altria.
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Some investors may be wary because the Obama administration has put cigarettes under the control of the Food and Drug Administration. But Wright says the bill creates so many regulatory hurdles that it helps Altria by limiting competition. "It's darn near a protected monopoly now," he says.
AT&T (T, news, msgs), 6.2% yield: AT&T, another one Wright likes, continues to lose land-line customers at a rapid rate, but it's more than making up for it in its wireless business.
Verizon Communications (VZ, news, msgs), 6.3% yield: Value investors Chris Armbruster and John Buckingham of Al Frank Fund (VALUX, news, msgs) and the Prudent Speculator, a top-ranked newsletter, recommend Verizon at prices up to $32.25 a share. Like AT&T, it has problems with its land-line business. But that's being offset by strength in wireless and FIOS, its fiber-based TV, data and phone service.
Annaly Capital Management (NLY, news, msgs), 15.2% yield: Annaly takes advantage of low interest rates by borrowing money at extremely low short-term rates and investing in debt instruments, such as mortgage-backed securities, that pay much higher returns.
Don't expect big gains from Annaly stock. Buckingham has a $20 price target on the stock, which recently sold for $18. But as long as it comes with a 15%-plus yield, it's a good deal.
Master limited partnerships
Some of the most attractive and safest yield plays right now come in the form of an investment vehicle known as a master limited partnership, or MLP. Many of these offer an 8% annual return or more.MLPs are a little complicated. Here's a primer:
As partnerships, MLPs don't pay tax on their earnings. So more income flows through to partners. This helps explain why MLP yields are so high. MLPs also allow you to defer taxes on your income for a long time.
Next, MLPs have a tradition of regularly increasing their dividends (called distributions) by about 5% a year. In this way, they beat out other income-producing investments like bonds, where payouts never go up.
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To get in on MLPs, you become a partner by purchasing shares through your broker. MLP shares are called units and trade just like stocks. Once you're a partner, MLP distributions come to you each quarter in two forms.
First, you get a share of partnership income. This part does get taxed. But it's the smaller of the two distribution streams -- often only 20% of the overall amount -- and you get to write off deductions and costs passed to you by the MLP.
The second stream is called a return of principal. Think of it as the money you put into the business as a partner coming back to you. You don't pay tax on this right away.
Instead, your cost basis -- the price you paid for your units -- is lowered by this amount for tax purposes. You show a bigger profit when you sell, and pay taxes on that higher profit.
You "realize" the gain -- and pay the tax -- only when you finally sell your MLP units. This is great news because it means you can put off taxes on most of your earnings for as long as you want, simply by holding on to your original investment.
There are some shortcomings with MLPs. One is that they can delay and complicate your tax filings. Plus it may not make sense to own them in tax-deferred accounts such as individual retirement accounts. (For more on the details, see the Web site of the National Association of Publicly Traded Partnerships.)
As with stocks, you can lose money on MLP units if they fall in price after you purchase them. But unless there's serious trouble, units should rebound over the long term because MLPs are typically in pretty stable businesses. You do need to go into MLPs with a time horizon of at least a few years in mind -- to enjoy the benefits of the tax deferral.
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