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Stocks and CD-like annuities

By Sheyna Steiner · Bankrate.com
Wednesday, October 26, 2011
Posted: 11 am ET

This blog has been around for a while now but it began well after the Fed drastically lowered the federal funds rate in December 2008.

Here's a quick recap of the entire history of the CD rates blog: CD rates are low, what can you do?

A column in the Winston-Salem Journal, "With CD yields so low, dividend stocks may be worth the risk," makes a case for dividend-paying stocks for a portion of funds that would otherwise go to CDs. The caveat is that investors diverging into stocks from CDs must have a long timeframe to keep their money invested in the market, lest the principal be eaten by volatility in the short-term.

"The easiest, relatively low-risk way to do this is to buy shares of an exchange-traded fund that specializes in quality dividend stocks. The SPDR S&P Dividend ETF (ticker: SDY), for instance, has a current yield of 3.38 percent and an expense ratio of 0.35 percent. It invests in an index of the 60 highest dividend yield stocks in the S&P 1500 index that have increased their dividends every year for at least 25 years," the Journalnow staff reports.

That's not all though.

The column also floats the idea of CD-like annuity products, also known as multiyear guaranteed annuities.

Though they vary by company, savers can typically get a decent yield for 5 years with a steep penalty for early withdrawal.

I recently spoke with Lance Scott, president of Bay Harbor Wealth Management in Baltimore, Md. who also recommended MYGAs as a possible stand-in for CDs.

"There are no fees. That is one of the benefits.  Time is your fee, like it is with a CD. You're going to be there for a certain time period -- 5 years is a pretty common one. If you don't need the money for 5 years and it is non-qualified money that you can let it grow tax-deferred it could be beneficial for you," Scott says.

There are a few things to beware of. For one, multi-year guaranteed annuities are not FDIC-insured but they are guaranteed by the insurance company selling the product. A guarantee is only as good as the person or company offering it, so that should be investigated.

Start by checking the rating on the insurance company. Insurance companies are rated by Standard & Poor's, Moody's, Fitch ratings and A.M. Best. Every state has an office for an insurance commissioner that investors can also call to get information as well.

The National Association of Insurance Commissioners has resources for consumers as well as links to the Web site of each states insurance commissioner.

One final caveat regarding CD-like annuities: check to see how the broker actually selling the annuity will be paid, if the commission comes out of your principal, it may negate the extra yield.

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