At Fidelity Investments, a one-year JPMorgan Chase CD yields 4.5%, and a five-year Morgan Stanley CD yields 5.1%.
With interest rates soaring, there are a lot of investment vehicles that provide substantial income.
One is brokered certificates of deposit (CDs). These are CDs issued by banks and sold through securities brokerages, such as Fidelity Investments and Charles Schwab. Full disclosure: I’ve been buying brokered CDs for more than five years.
The CDs are generally government-insured — by the Federal Deposit Insurance Corp. (FDIC) – for up to $250,000.
The standout feature of brokered CDs is that their interest rates are generally well above the rate you’d get by purchasing a CD directly from a bank.
For example, on Fidelity’s platform (where I buy my CDs), a one-year JPMorgan Chase CD yields 4.5%. But if you purchase a one-year CD directly from Chase, it yields only 2.02%, according to the Chase web site.
Brokered CDs have a higher rate because they are in a more competitive market. Numerous banks offer CDs on the platforms of Fidelity and other brokerages.
Also, the broker buys large amounts of CDs from the banks, which it then sells to customers. Because the broker purchases in big chunks, banks are willing to pay higher rates.
Yields Beat Treasuries
CD yields often exceed those of Treasuries too. For example, a five-year Morgan Stanley CD yields 5.1%, compared to 4.40% for a five-year Treasury.
If Treasuries and CDs have nearly the same yield, I’ll buy Treasuries, because the government guarantee for them is more ironclad. But in an example like the one above, I’d buy the CD.
Remember that if you want to get rid of a brokered CD, you have to sell it through a brokerage. And if rates have risen since you bought it, you’ll likely get less than what you paid for it. But that may be no worse than liquidating a regular CD before maturity, which will incur financial penalties.
Also keep in mind that some brokered CDs are callable. That means the banks can close the CDs early and refund your money. But this will generally happen only when interest rates are falling.
You might want to consider a combination of Treasuries, brokered CDs and investment-grade corporate bonds for your fixed-income portfolio. Full disclosure: That’s what I do, sticking mostly to double- and single-A corporate bonds.
Another fixed-income product you might think about is preferred stocks. Some of these securities yield more than 6%. Full disclosure: I own these too.
Recall that preferred stocks are a hybrid between stocks and bonds. They pay regular dividends and preferred stockholders have a higher claim on those dividends than common shareholders.
Preferred stocks generally don’t fluctuate as much in value as common stocks, because the benefit of owning a preferred stock is its dividend payments rather than a capital gain.
Preferred stock issuers are generally high-quality financial companies, along with pipeline and utility operators.