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What to do if the Fed Cuts Rates Again

- Alan Lavine and Gail Liberman

If the Federal Reserve cuts interest rates again, our money funds and bank Money Market Accounts might pay us about one-half of one percent if we're lucky. You're better off putting your money under your mattress! That way, at least you won't pay taxes on your earnings.

I'm constantly asked where it's possible to get higher yields today. Unfortunately, to get higher yields, you have to take on greater risks. Here are some options.

You might consider income-producing stocks. However, beware. Your principal on income-producing stocks isn't government-guaranteed like a bank deposit.

Real estate investment trusts (REITs) are a type of income-producing stock. REITs, which yield around 7 percent, make money from leasing offices, apartments or shopping malls. You also can invest in real estate stock funds, which yield in the 5 percent range. These mutual funds own a large number of REITs in different businesses and geographic areas.

Large company stock value funds also pay yields of at least 2 percent. These funds invest in blue-chip stocks that pay dividends. So you get both growth and income from your investment.

Convertible bond funds invest in bonds that can be switched into stocks. These funds yield in the 4 percent area. Convertible bond funds are less risky than stock funds. But problems with either the stock or bond markets can affect performance.

Preferred stock funds, yielding in the 7 percent range, are closed-end mutual funds whose shares are traded on the stock exchange. Preferred stocks are a little less risky than common stock because their stockholders get paid before common stockholders if the company goes belly-up. But bondholders get preference over preferred stockholders.

High-yield bonds are issued by poor credit-rated companies. You can earn more than 7 percent in high-yield bond funds that own a large number of issuers. High-yield bond fund performance tracks the stock market rather than the bond market. So if stocks do well, high yield bonds typically increase in value.

All of the above investments, with the exception of real estate stocks and bonds, will benefit from the new tax rules. You will only pay 15 percent tax on your stock dividends. In the past, you paid ordinary income tax on the dividends, based on your tax bracket.

If you invest in any of these securities, however, make sure you are well-diversified in stocks, bonds and cash. You don't want to put all your eggs in one basket.

It still is a good idea to keep some money in cash. Those money funds and bank Money Market Accounts might be looking much better if interest rates happen to rise.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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