The Right Way to Stash Your Cash

The failure last week of California bank IndyMac has many savers worried about whether their bank may be next. Images of customers standing in long lines to get their money evoked memories of the big bank runs during the Great Depression.

Back then, being the first in line at your bank could mean the difference between getting your money or losing everything. Yet while modern safeguards protect most depositors in the event of a bank failure, the death of IndyMac gives you a good opportunity to look at your cash holdings and make sure they're contributing their fair share toward your financial success.

The FDIC and you
First and foremost, the vast majority of people with bank accounts don't need to worry at all about their savings. The Federal Deposit Insurance Corporation insures bank accounts up to a total of $100,000, so unless you have more than that at your bank, the FDIC will give you all of your money back.

If you have more than that in cash, you have a number of options. The simplest thing is to spread your money among several different banks. Your FDIC coverage gives you a $100,000 limit for each bank, so if you have accounts at three different banks, you can protect as much as $300,000.

You can also get additional coverage by changing the ownership of your accounts. For example, if you have an account that's just in your name and another account at the same bank held jointly with someone else, both would be covered up to $100,000 each. Similarly, adding someone as a pay-on-death beneficiary can help you increase your FDIC insured amount.

Too much cash?
The bigger question, though, is whether it ever makes sense to have such large amounts of money in a bank account. At today's rates, keeping money in a savings account doesn't even let you keep up with inflation. Wells Fargo (NYSE: WFC  ) , for instance, currently pays 1.65% on one of its savings accounts. Bank of America (NYSE: BAC  ) pays as much as 2.35% to certain savings-account customers.

On the other hand, some longer-term bank CDs have much more attractive rates. According to Bankrate, you can get a five-year CD paying 5% right now. That's well ahead of the 3.5% or so that five-year Treasury notes currently offer.

Smart asset allocation
For the fixed-income portion of your portfolio, keeping money in bank CDs may be the best of your alternatives. But many investors make the mistake of being too conservative with their money and deny themselves the opportunity to see some of their assets grow. They may maintain their principal intact, but their income becomes dependent on interest rates, and their principal isn't able to grow to cover inflation-driven higher costs.

Dividend-paying stocks, on the other hand, offer you the best of both worlds. You get current income from quarterly dividends, and if the stocks you pick do well, you also get a growing portfolio.

Dividend stocks are a tough sell right now, since many of the highest-yielding ones are the very banks that savers are scared of. But there are still several stocks with attractive yields that have held up well in the overall downturn:

Stock

Dividend Yield

1-Year Return

5-Year Annualized Return

HCP (NYSE: HCP  )

5.0%

39.6%

17.7%

Southern (NYSE: SO  )

4.8%

9.0%

8.8%

UST (NYSE: UST  )

4.7%

4.6%

15.4%

Xcel Energy (NYSE: XEL  )

4.8%

2.3%

11.6%

Vectren (NYSE: VVC  )

4.5%

14.8%

9.7%

Source: Yahoo! Finance.

That doesn't mean you should move all of your money into stocks. Although dividend stocks can help you protect your portfolio in a bear market, they still involve taking risk -- risk that you may not be able to afford, given your particular financial situation.

Whether you decide to take some of your hard-earned cash in the stock market or keep it at the bank, however, make sure you get the maximum amount of insurance protection you're entitled to. There's simply no reason any depositor should lose money from a bank failure.

To learn more about how dividend stocks can enhance your returns, read about:

Southern and Bank of America are Motley Fool Income Investor recommendations. Our dividend stock newsletter service gives you monthly recommendations on promising investments, along with advice on how to position your portfolio for tough times. Take a look free with a 30-day trial.

Fool contributor Dan Caplinger loves seeing those dividends hit his brokerage account, but he also has some insured bank CDs. He doesn't own shares of the companies mentioned in this article. Never fear: The Fool's disclosure policy is near.


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