Getting more out of your money

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Coca-Cola bottles are displayed at Andronico's Market in San Francisco, Saturday, July 15, 2006. The Coca-Cola Co., the world's largest beverage maker, reports a 7 percent increase in second-quarter profit on a modest rise in sales. (AP Photo/Jeff Chiu)

Updated: November 10, 2011 11:09AM

In the old days, they put debtors in prison. But these days it’s savers who feel like they are being punished.

The Federal Reserve added two years to their sentence last month when it said it would keep short-term interest rates at “exceptionally low levels” through at least mid-2013.

The Fed hopes low interest rates will stimulate the economy by prodding banks to lend, borrowers to borrow and companies to stop hoarding cash.

It also wants to force cautious investors out of savings accounts and money market funds into riskier assets such as stocks and longer-term bonds. Rising stock prices presumably would make people feel richer and more willing to spend. A strong bond market would help keep long-term rates low.

If you have been hiding out in safe havens, is it finally time to venture into something higher-risk and higher yielding?

The answer depends on when you need the money and how much risk you can take.

For money you cannot lose, your options are FDIC-insured bank deposits, money market funds and short-term Treasury bills or Treasury funds. You can get a little more than 1 percent by shopping around, but to get a higher yield you must risk losing some of your principal.

“There is no free lunch,” says Eric Jacobson, Morningstar’s director of fixed-income research.

Here’s some expert advice for people looking for yield in the current environment.

Greg McBride, senior financial analyst, Bankrate.com:

For money you cannot afford to lose, there are few options but “there is no sense letting it pile up in a money market fund at near zero return,” says Mcbride.

Several banks offer FDIC-insured savings accounts yielding 1 to 1.1 percent. The catch: Most don’t have branches, so you will have to do business online, by phone or via mail.

McBride would also consider one- or two-year CDs, which yield up to 1.25 percent and 1.4 percent. But he would avoid five-year CDs, which top out around 2.3 percent because the extra yield “does not come close to compensating you” for inflation risk.

To find high-yield savings and CDs, go to Bankrate.com.

Rick Ashburn of Creekside Partners in Lafayette, Calif.

Getting into risky assets now “is a sucker’s bet,” says Ashburn.

In his view, the stock market is priced for “a continued and unbroken economic recovery.” But the bond market “is priced for a long-term sideways, near-recession environment with no inflation,” he adds. Both can’t be right.

If the stock market is right and the economy is not headed for a recession, bond yields will rise and their prices, which move in the opposite direction, will fall.

If the bond market is right and the economy can’t break out of its funk, “then the stock market is going to correct,” he says.

He thinks the bond market is probably right, which is why his typical client has only 20 percent in stocks instead of the usual 60 percent.

James Demmert of Main Street Research in Sausalito, Calif.:

For money you don’t need soon and can afford to risk, Demmert would consider dividend-paying common stocks in recession-resistant sectors such as consumer staples, utilities and health care.

Some companies that have dividend yields (annual dividend divided by current price) ranging from 2.7 percent to nearly 5 percent include Procter & Gamble, McDonald’s, Coca-Cola, Unilever, Bristol-Myers Squibb, Johnson and Johnson, Abbott Laboratories, Dominion Resources, AstraZeneca and American Electric Power.

Eric Jacobson of Chicago-based Morningstar:

For most investors, the best way to own bonds is in a mutual fund. They have the staff to research bonds and the size to get the best prices.

“The bond market, the municipal market especially, is a shark tank,” Jacobson says. “Individuals, no matter how smart they are, cannot get the best deals. Why do you want to jump in that tank yourself when you can hire your own shark for practically nothing?”

Jacobson would stick with Fidelity for municipal bond funds. For taxable bond funds, “My personal preference is to go with a fairly diversified bond fund where the managers know what they are doing and give them the flexibility to choose” which types and maturities to buy.

One such manager is Bill Gross, manager of the giant Pimco Total Return fund. Even though Gross has admitted that he made a mistake by selling Treasury bonds before their big rally this year, Jacobson would still recommend Pimco Total Return if you can get it without a sales commission in a 401(k) plan or through an adviser.

If you can’t, consider the no-load Harbor Bond or Managers Pimco Bond, which are also managed by Gross.

Scripps Howard News Service