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Answer:
Dear
BuyandHolder,
Your
instincts are right. A diversified portfolio is always
wise -- it's a proven way to reduce risk. You might
want to read a previous column on Asset Allocation
which explains this in greater detail. Click HERE.
REITs
One
way you can stay in stocks and yet receive an above-average
dividend is with a portfolio containing carefully
selected Real Estate Investment Trusts (REITs).
We've discussed these stocks before -- click HERE
to read. The key point to keep in mind is that by
law, REITs must return most of their income to shareholders.
In fact, for a corporation to qualify as a REIT and
gain the advantages of being a pass-through entity
free from taxation (at the corporate level), the IRS
requires that the REIT pay at least 90% of its taxable
income to shareholders.
You
can find a list of REITs in Value Line Investment
Survey. Copies of this weekly, independent analysis
of stocks are available at most public libraries.
You can also get information about the publication's
introductory offer at: www.ValueLine.com.
$Tip:
In Value Line's weekly Summary Index, you will
also find a listing of stocks with high dividends.
Please pay attention to the individual rankings for
"safety" and "timeliness." In addition to REITs you'll
find that utility stocks typically have above average
dividends.
About
Bank CDs
Bank
CDs are an excellent place for stashing your emergency
nestegg. In fact, I recommend that everyone keep three
to six months' worth of living expenses in assorted
CDs and/or a money market fund. One cannot always
predict being fired, having work hours reduced or
encountering a spell of poor health. It's always comforting
to have put aside extra money.
Having
said that, CDs come with some negatives. For example,
you can get a higher return if you invest in longer
term CDs, but the if interest rates rise, you're stuck
with your money earning a below-market rate until
your CDs mature.
One
way to combat getting locked in is to ladder
your CDs. By investing your money in CDs of different
maturities, you wind up with the higher rates offered
by long-term certificates and yet you will have money
coming due from shorter-term certificates to reinvest
if rates climb.
So
consider, spreading out your money and purchase a
six-month, one-year, two-year and a five-year CD.
Another
approach is to purchase a bump-up CD. Offered
by a growing number banks and credit unions, bump-ups
allow you to make one adjustment during the life of
the CD to a new, higher prevailing interest rate.
The
trade-off is that bump-ups pay slightly lower interest
than certificates of the same maturity with no bells
and whistles. Some bump-ups also have higher minimums.
You
can also earn a higher interest rate with a callable
CD. But, the issuing bank has the right to cash
out your CD after a specific time period. You get
back your initial investment, plus interest.
Caution:
If rates go up, you're stuck until the callable CD
matures because the bank is unlikely to call it. On
the other hand, if rates go down, the bank is likely
to call your CD and you'll be forced to reinvest that
money at a lower rate. Therefore, a callable CD must
have a sufficiently high rate in order to be worthwhile.
For
Further Information
One
of the best sources for continually updated information
on all types of CDs is: www.bankrate.com
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