On
the Lookout for Higher Returns
After the Federal Reserve reduced short-term interest rates 11 times in 2001 and an
additional half point in November 2002, yields on money market funds sunk to
less than half the rate of inflation. This prompted many investors to look
elsewhere for higher returns.1
Today, with interest rates still at historically low levels, some investors have turned to certain mutual
funds, dividend-paying stocks, and bonds to help generate income. Here’s a
look at each of these alternatives.
Mixing
in Mutual Funds
Mutual funds pool the assets of many shareholders to invest in a variety of
securities designed to pursue a specific objective.2
Although mutual funds are generally considered to be long-term investments, many
funds focus on conservative securities that may offer steady income. Though some
funds are preconfigured to provide a monthly or quarterly payout, others may
offer the option to do the same.
Depending on Dividends
Dividend-paying stocks are another potential source of income, although stocks
involve substantially higher investment risk than many other income-oriented
vehicles.3 A dividend is a regular payment from
a company to its stockholders. Usually, dividends can be reinvested
automatically or set up to provide shareholder income.
Some people believe that dividends are an indication of a company’s financial
health. And during the recent bull market, dividends accounted for 40 percent of
the S&P 500 return.4
Building on Bonds
Bonds and bond mutual funds have attracted many investors in recent years.5
During times of volatile stock prices and sliding interest rates, some investors
have used bonds to diversify their portfolios and garner income. But committing
new money to bonds may not be as prudent in today’s low-interest-rate
environment. Because bond prices move in the opposite direction of interest
rates, bonds and bond mutual funds may lose value if interest rates rise.
After nearly two years of historically low interest rates, many investors are
looking away from money markets in search of higher returns. Depending on your
risk tolerance and financial goals, adding one or more higher-risk income
alternatives may be a solid move for your portfolio.
1) Wiesenberger, 2002. Money market funds are represented by the
30-day Money Market Yield Index. Performance described is for the period
10/31/01 to 10/31/02. The performance of an unmanaged index is not indicative of
the performance of any particular investment. Individuals cannot invest directly
in an index. Past performance is never a guarantee of future results. Money
market funds are neither insured nor guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although a money market fund
attempts to maintain a stable $1 share price, you can lose money by investing in
a fund.
2) There are fees and expenses associated with investing in mutual funds,
including portfolio management fees and expenses and sales charges. Mutual funds
are sold by prospectus only. Be sure to read the prospectus carefully before
deciding whether to invest.
3, 5) The return and principal value of stocks and bonds fluctuate with changes
in market conditions. Shares, when sold, may be worth more or less than their
original cost.
4) Kiplinger’s, November 18, 2002
© 2002
Emerald Publications
