Inflation-beating investments

Liquidity: Not good. You cannot redeem I bonds for 12 months, and if you sell before five years you'llforfeit interest from the three most recent months. To avoid penalties, you must wait five years to cash out.

Pros: Safety and inflation protection. Generally, bonds won't pay you the handsome returns of stocks, but the principal is guaranteed. They're also exempt from state and local taxes, and investors can defer what they owe in federal taxes until they cash them in.

Cons: Limited growth. Even though you beat inflation, I bonds generally won't have the kind of growth as riskier investments. Lack of liquidity is also a negative.

Dividend-rich stocks 
How they work: As a rule, public companies either reinvest earnings or pass them along to shareholders as dividends. For beating inflation, the second variety is hard to beat: Dividend-rich stocks provide income, but unlike fixed-income investments, they have the potential for capital growth as well. Large, established stocks, such as those in the Standard & Poor's 500, have a greater likelihood of offering dividends. Those paying the highest dividends are generally found in such sectors as industrials, utilities, financial services, pharmaceuticals and consumer staples.

Who they're good for: Most retirees need the potential growth of equities, whether they pay dividends or not. But as seniors leave the work force, the added bonus of dividends is a smart choice for individuals who will need assets that provide both growth and income.

Cost: Share prices vary depending on the company and market conditions. A commission is involved with the purchase of stocks, whether you purchase through a full-service brokerage firm or you're a self-directed investor. Costs will be lower for the latter type of firm. If you buy a diversified mutual fund that focuses on dividend-rich stocks, you'll pay an expense ratio.


Liquidity: Very liquid, in theory. You can buy or sell any dividend-paying equities at any time. However, to reap lower tax benefits, you must own equities for a certain amount of time -- generally more than 60 days in a 121-day period surrounding the so-called ex-dividend date, which is the day after shareholders who are entitled to a dividend are identified. 

Pros: Low taxes -- for now. Until 2010, qualified dividends are subject to capital gains taxes, which are no higher than 15 percent for individuals in tax brackets 25 percent or higher. (Individuals in lower tax brackets owe no tax on dividends starting in 2008 until Jan. 1, 2011.)

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