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How To Deal With Low Interest Rates

The Federal Reserve recently said that it plans to keep interest rates near zero for at least the next two years. This means that low-risk savings vehicles, like CDs, Treasuries and money market accounts can’t be counted on to even help you keep up with inflation. The Consumer Price Index was up more than 3 percent last year, 10-year Treasury rates are around 2 percent and money markets pay even less. So, you’re losing ground to inflation by investing in “safe” investments. Are there alternatives?

1. Dividend Paying Stocks (current yield 3.5-5 percent) — While there are risks to all investments, many people are considering good quality companies that pay dividends. The S&P 500’s yield is higher than the 10-year Treasury for only the second time since 1947. The price of the stock will fluctuate, but has the possibility of increasing over time. 2. Master Limited Partnerships (current yield 4.5-6+ percent) — Oil and natural gas pipeline companies comprise the core of MLP investments. Energy companies pay these firms to transport and store their commodities, making MLPs high cash flow generating toll collectors. 3. Emerging Market Debt (current yield 5-6 percent) — Fast growing emerging markets have been a favorite of investors. Unlike equity, government and corporate debt of these countries has recently gained favor. Half of the $46 billion that’s been invested in this category has come only in the past two years, much less than the $180 billion in emerging market equity. As an investor, you can invest either in dollar-denominated or local-currency denominated. 4. High Yield Bonds (current yield 7-8 percent) — More than $14 billion was invested last year, but there was a lot of volatility, especially due to the nervousness about the European situation. The yield is attractive, but be warned: during times of market volatility, they act a lot like equities, so investors should be aware of this. 5. Municipal Bonds (current yield 3-7 percent, tax-free) — Last year municipal bonds generated an average return of about 10 percent, and while experts don’t expect as stellar a year this year, municipal bonds still offer a good value.

While all the above are enticing compared to safe bank accounts, make sure you understand the risks before you invest.

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