There's a bright side to rising interest rates: There are now options for savings to get decent income. And Series I Savings Bonds are just one of them.
Investors don't have to look far to find interest-generating investments yielding nearly 7%. I Bonds now sport a published rate of 6.89%. But there are other options for respectable yields, too, including various bond ETFs and even dividends and savings accounts.
And some real money is to be made, judging by the amount of cash investors have sitting around. The typical brokerage account at Charles Schwab is nearly 12% cash, likely getting little to no interest. That's means many investors have $22,000 in cash that could be working for them. I Bonds alone would pay you more than $1,500 by annualizing the interest rate.
"We believe fixed income investors have likely seen the worst of price depreciation and can now look for improved yields to contribute to total return," said John Lynch, chief investment officer at Comerica.
And the time is now. Nearly 30% of Americans polled think a savings account is their best long-term investment, says a December IBD/TIPP poll. That's nearly double the 18% that think stocks are.
Looking For Low-Risk Income
If you're looking for not taking much risk on your savings, I Bonds are a promising bet. Although the new published rate of 6.89% is down from where it was last year, it's hard to get paid so much for taking so little risk.
Keep in mind, though, that rate is only valid through April 30 of this year. You must also buy the bonds directly through the U.S. Treasury's website. You can cash in your I Bond once you hold it a year. But if you sell in less than five years, you may forfeit a portion of your interest. You get another bonus at tax time: The interest is taxable Federally, but state and local taxes don't apply.
Another pretty low-risk option is TIPS, or Treasury Inflation Protected Securities. TIPS pay interest indexed to inflation. Luckily there are options to easily buy TIPS without moving cash out of your brokerage account. One of the more popular is the $13.9 billion in assets Schwab U.S. TIPS ETF. It sports an SEC yield of 6.62%, not far behind I Bonds.
Paid For Safety
If you're looking for other safe bets, you can still score some quality returns.
Simply moving money into high-yield savings accounts could easily yield 3.3% annually. That would put an extra $726 in your pocket a year. If you're willing to lock your money down for a year's time, certificates of deposit yielding 4.5% are readily available.
Another popular low-risk bet is the JPMorgan Ultra-Short Income ETF. It yields 4.51%. This $24 billion in assets ETF owns mostly securities that mature in only a few months. Owning such short-term bonds protects investors from rising rates eroding the value of longer-term bonds.
More Risk, More Return
But for those willing to shoulder more risk, higher yields might make it worth their while.
High yield bond ETFs, which own the debts of companies with lower ratings, are pushing toward 9% yields. The SPDR Portfolio High Yield Bond ETF is now yielding 8.68%. Putting your $20,000 in idle cash there would pay you $1,909 a year, even better than iBonds.
But it's important to note that with this strategy, you are exposed to the risk of individual bonds defaulting. But the ETF owns more than 1,900 bonds, thus attempting to reduce the risk of any one issuer defaulting.
Put Your Savings To Work
Options for putting your cash to work generating yield
| Investment | Symbol | SEC yield | Annual income on typical $22,000 cash balance at brokerage |
|---|---|---|---|
| SPDR Portfolio High Yield Bond | 8.68% | $1,909.6 | |
| Series I Savings Bonds | 6.89% | 1,515.8 | |
| Schwab U.S. TIPS | 6.62% | 1,456.4 | |
| Vanguard Short-Term Corporate Bond | 5.02% | 1,104.4 | |
| JPMorgan Ultra-Short Income | 4.51% | 992.2 | |
| One-year CDs | 4.50% | 990 | |
| Vanguard Total Bond Market ETF | 4.15% | 913 | |
| High yield savings | 3.30% | 726 | |
| SPDR S&P Dividend ETF | 2.60% | 572 |
