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By Jason Stipp | 06-15-2011 10:49 AM

Squeeze More Yield Without Breaking the Bank

Morningstar's Christine Benz offers dos and don'ts for investors looking to earn a bit more on their cash-like holdings.

Jason Stipp: I'm Jason Stipp for Morningstar.

More than two years into the recovery, interest rates are still stubbornly low. So, is there any safe way to get a little bit of extra yield?

Here with me to offer some tips is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So the Federal Reserve Chairman Ben Bernanke basically said recently that he's probably not going to be thinking about raising rates anytime soon. So that's bad news for a lot of people who have money in savings accounts or lower-yielding investments. It means they are not going to get lot of money for a while. A lot of people are thinking about where can I get some of that extra yield? But before we get into that, I just want to get a sense of how bad is the low-yield environment? Have we seen improvement in interest rates anywhere?

Benz: It's really bad, Jason. So, just an example, the typical CD, one-year CD product out there right now has a yield in the neighborhood of 1.2%, 1.3% if you are very lucky. A lot of money market funds, even very good low-cost money market funds like those at Vanguard, are barely eking into the black in terms of their most recently available yield figure.

So it's a tough environment, particularly given that we're always telling people who are in retirement that they need to have this one- or two-year sleeve of cash set aside. It's really tough for those folks because this is dead money or worse, given that inflation is possibly taking a bite out of that return.

Stipp: We certainly saw inflation start to heat up this spring. I think it's abated a little bit, but that 1% is not going to get you very far when you're seeing annualized inflation in the 2% to 3% range.

Benz: Right, exactly.

Stipp: So, there are a lot of people who are seeking yield, they are looking for yield; they are looking at some other alternatives to get a little bit of extra money out of some of their safer assets.

Well, there are safer ways to do this and less safe ways to do this. What are some of the safer ways if I am trying to get a little bit of extra yield to try to eke that out? What can I do?

Benz: Well in general CDs rather than managed products like money market accounts and money market funds will give you a little bit higher yield and the reason is that you are giving up some liquidity. So typically you have to sign on for a six-month or one-year CD, and you'll pay a withdrawal penalty if you need to get out early.

One product--and I give kudos to Ross Levin, the financial planner who was at our conference last week--he was talking about Ally Bank's five-year CD. People might say well, I don't want to tie my money up for five years, but Ally Bank's product offers something like a 2.4% yield currently and just a two-month penalty if you need to get your money out early. So that is kind of a neat product to consider without heavy strictures to pull down a little bit of extra yield.

Another idea, Ally Bank also has what's called "Raise Your Rate" CD. This is a two-year product. I think the yield is in the neighborhood of 1.4%, 1.5% currently. Not a great yield, but the advantage is if you see the yields rise on two-year CDs during the life of your holding, you are actually able to obtain that one-time higher yield. So you get a bump up in your yield. That's a nice product to consider.

Stipp: So we're seeing there are a lot of different institutions that offer CDs. What's a good way to comparison shop? Should you go out and look across the neighborhood or how much shopping should you do here?

Benz: Well, I think it's an important reminder that going nationally or casting a wider net can be a really good thing to do when you are shopping among these products. A lot of folks are used to just stopping in at their bank and renewing their CDs. It might be good to cast a wider net. BankRate recently did a study where they looked at regional differences in CD rates and found that there could be some appreciable differences, and in some regions where rates tended to be low, they tended to stay low. So it's important to shop around and cast a wider net maybe opt for one of these online products versus just heading into your regional bank and opting for whatever they may have on offer.

Stipp: So what is liquidity is a big issue for me, and I want to make sure that I have access to those funds. Is there any other option where I might be able to put my money and get a little bit more, maybe a few more basis points of return on the yield?

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