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3 CD alternatives

By Sheyna Steiner ·
Wednesday, July 13, 2011
Posted: 12 pm ET

Federal Reserve Chairman Ben Bernanke testified before Congress this week, reporting that the Fed is ready and willing to provide more stimulus to the economy if it's needed.

His fingers are crossed, however, that the economy will move past the transitory bumps that have slowed down growth this year.

Before Bernanke's testimony, a recent Bloomberg News survey of economists posited that an interest rate increase could come in the second quarter of 2012 -- assuming things go as planned in the meantime.

For savers, that's another year of trifling CD rates with no promise of a payoff at the end of that year. However, there are some alternatives savers can consider.

  1. I bonds: the inflation-fighting bond is earning 4.6 percent until November, when the variable rate will be reset based on inflation. The yield on the I bond is made up of two rates: variable and fixed. The variable rate reflects inflation, and the fixed rate is set mysteriously according to the whims of the Treasury department. The drawback to I bonds right now is the fixed rate; it's currently pegged at a whopping zero percent. As you have to hold I bonds for five years before they're redeemable, it's a bit of a gamble as to whether inflation will keep the variable rate viable.
  2. High-yield checking accounts: A recent Bankrate survey found that the average APY on high-yield checking accounts is 2.56 percent. There are some hoops to jump through to qualify for those yields though. Watch this Bankrate video to learn more.
  3. Dividend paying stocks: According to the July 12 story on the Motley Fool, "How long can dividend stocks rule?" in the first half of 2011, 954 companies raised dividends or resumed paying them -- up 30 percent from last year. Stocks are, of course, much more risky than CDs. With an FDIC-insured CD, there is no way to lose money; with individual stocks, an investor is taking the risk of losing part or all of his money. However, some stocks are riskier than others. To learn more about some dividend-paying stocks that could be suitable for income investors, read the blog post, "The dividend aristocrats."

What CD alternatives have you considered?

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Sheyna Steiner
July 14, 2011 at 11:43 am

Thank you very much Peter!

Peter Hapeman
July 14, 2011 at 11:41 am

Correction for iBonds. They are redeamable after one year. Before 5 years they incur a 3 month interest penalty. If you buy at the end of the month, they required hold is only 11 months plus a day or 2, and you are guarenteed to get at least 2.3% + 1/2 of the next determined inflation rate. It's an even better deal than the article implies. Maximun annual purchase is only 5k per social security number, however.