Investors soured on most S&P 500 stocks this month. And it's easy to see why: You can get 5.6% returns without all the market's drama. And for many people, that may be good enough.
Plunk down just $10,000 on a one-year CD yielding 5.6% — the national average, says Bankrate.com — and you'll be sitting on $17,244 in just 10 years on the assumption that rates hold steady. Able to wait 20 years? That chunk of money will be worth $29,736.
"When you can earn in excess of 5% risk-free, that prompts some investors to think twice about just how much of their portfolio they're willing to expose to the volatility of the stock market," said Greg McBride, chief financial analyst at Bankrate.com.
What's Going On?
Why such eye-popping potential gains from sleepy savings accounts? Returns on cash are soaring, piggybacking on 10-year Treasuries' yield rise to around 4.3%. Even locking in at 4.3% would turn $10,000 into $15,235 in 10 years.
Suddenly, everything from certificates of deposit to money markets and even savings accounts are easily cracking the 5% yield barrier. And if you look, you can find higher rates, still.
5%-Plus: Savings Accounts Give S&P 500 A Run For Its Money
Scanning across the cash world, it's hard to not find solid returns.
Nationally available savings accounts paying 5.2% are available, McBride says. Even normally staid money markets paying north of 5% can be easily had. Such returns look appealing compared with the S&P 500's 4% decline in August. Additionally, the S&P 500 is currently yielding just 1.5%.
6%: Tipping The Scale For TIPS
Yields on Treasury Inflation Protected Securities, or TIPS, are also perking up. These government securities pay a return adjusted for inflation. And now the yields look solid. The Pimco 1-5 Year US TIPS Index is paying an SEC yield of 6%, says Morningstar Direct.
And iShares TIPS Bond pays 5.76%.
7%: Looking For Preferential Treatment
Another source of high yields are preferred stocks. These are a hybrid of stocks and bonds. Preferred stocks can pay up to 7% or higher annual returns in today's market.
The Virtus InfraCap US Preferred Stock ETF sports an SEC yield of 10.4%. Other options include Global X Variable Rate Preferred at 7.71% and Global X US Preferred at 6.61%.
10%-Plus: Cashing In On Bank Loans
Without trying too hard, though, you can find still higher yields. The SPDR Blackstone Senior Loan ETF holds debt with average B ratings. And it's paying an SEC yield of nearly 10%, says Morningstar Direct.
Similarly, the Invesco Senior Loan ETF is yielding an SEC yield of 8.38%.
But Wait, There's A Catch
Before totally giving up on the stock market, though, there are some important catches to consider.
First, high yields aren't forever. If you buy a one-year CD, there's always a chance rates will be lower when it comes due for renewal. Bond ETFs, too, will replace existing bonds over time. That pushes yield down, all things held equal, if rates fall in the future. And don't forget about inflation.
Next, 6% sounds great. But it's still less than the S&P 500's historical total return. The S&P 500 has returned 10% annually on average since 1928, says IFA.com. That means putting $10,000 down on the S&P 500 for 10 years, on average, could leave you with $25,937 in a decade's time. That's 50% more than you'd have from a 5.6% rate.
The Time For Bonds Vs. S&P 500?
But the risk of added gains from stocks is getting too large for some investors to sweat. And stocks' returns have already topped bonds by an usually high 5% a year since 1975, says Bespoke Investment Group.
Since their Covid lows, stocks' returns topped those of bonds by a record margin. S&P 500 investors have scored along the way.
Stocks' returns more than doubled those of bonds in the past 41 months. "That's the best performance ever over a similar time window, topping the strongest stocks-bonds outperformance from the tech bubble of the late 1990s and early 2000s," Bespoke said.
But such divergences often open the possibility for a bounceback. And that would bode well for bonds. And high yields only make the shift more appealing.
"If history is any guide, the most recent surge in relative performance for stocks versus bonds will be followed by the opposite," Bespoke said. "But when that reversal starts is hard to guess."
Places To Stash Cash
| Vehicle | Example | Yield | Symbol |
|---|---|---|---|
| Preferred stock | Virtus InfraCap US Preferred | 10.36%* | |
| Senior loan | SPDR Blackstone Senior Loan | 9.96%* | |
| Preferred stock | Global X US Preferred | 6.61%* | |
| TIPS | Pimco 15+ Year US TIPS | 6.21%* | |
| Savings account | UFB Direct | 5.25% | |
| One-year CD | UFB Direct | 5.25% | |
| Money market | CIT Bank | 5.05% |
Sources: Bankrate.com, Morningstar Direct, S&P Global Market Intelligence, IBD. *-SEC yield
Follow Matt Krantz on Twitter @mattkrantz
