Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Increase Your CD Income

If you've been to your neighborhood bank lately, you've probably noticed that CD rates have already started to fall. For savers, that's bad news -- especially if you're on a fixed income and depend on your interest income to cover your living expenses.

In your search for higher rates, one place you might not think about is your brokerage account. After all, most people use their brokers to buy stocks, not CDs. But an increasing number of brokers offer brokered CDs, which may pay you more interest.

How brokered CDs work
The idea behind brokered CDs is pretty simple. In addition to providing CDs directly to their customers, some banks seek to extend their reach by offering CDs in large blocks to brokers, who then resell them to their clients. Many banks participate in the brokered CD market, ranging from well-known names like Morgan Stanley (NYSE: MS  ) , Countrywide Financial (NYSE: CFC  ) , and Lehman Brothers (NYSE: LEH  ) to much smaller banks.

Just like bank CDs, brokered CDs are FDIC-insured up to $100,000. With the threat of potential bankruptcy hovering over brokerage firm E*Trade Financial (Nasdaq: ETFC  ) , that insurance is becoming more and more important to protect your assets. Lots of brokers sell them, including Charles Schwab (Nasdaq: SCHW  ) , Fidelity, and TD Ameritrade (Nasdaq: AMTD  ) . From the investor's perspective, a brokered CD closely resembles a traditional bank CD, with just a few exceptions.

Having second thoughts
You're probably familiar with the penalties that banks charge for withdrawing money from your CD early. Typically, you might have to give up between three and six months' worth of interest if you close out your CD before its maturity date.

Brokered CDs work a bit differently. If you need money early, you generally have to sell your CD on the secondary market. Depending on prevailing interest rates and market conditions, there's a risk that you'll lose principal.

Waiting for the call
In addition, some brokered CDs are callable. That means the bank has the right to pay you back before the final maturity date.

The call feature is one of the most confusing things about brokered CDs. The best rates are often on callable CDs with long maturities of 10 years or more. For instance, you can buy a CD paying 6.12% interest. It's scheduled to mature in 2027, but the bank could buy it back from you as early as next year. It's easy to get confused and think that you own a one-year CD at an unheard-of rate.

In reality, though, you're taking a big risk. If rates fall, then the bank will likely call the CD, forcing you to find a replacement CD at lower rates. But if rates go up, you could be locked in for the full 20-year term.

Buyer beware
Before you buy a brokered CD, make sure you understand all the terms and conditions that apply. In addition, check out whether making a direct investment would pay you a better rate. For instance, as of today, one bank offers investors a 5.4% rate on a six-month CD if they invest directly. On a list of brokered CDs, however, that bank is only paying 4.7% for the same CD.

Nevertheless, brokered CDs may give you a much-needed boost in your monthly income. As long as you're careful and understand what you're getting into, buying a brokered CD can open up a whole new world of higher rates.

You can learn more about saving by brushing up on:

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 540143, ~/Articles/ArticleHandler.aspx, 5/26/2016 11:11:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,815.93 -35.58 -0.20%
S&P 500 2,087.20 -3.34 -0.16%
NASD 4,896.75 1.86 0.04%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/26/2016 10:54 AM
AMTD $31.93 Down -0.47 -1.45%
TD Ameritrade CAPS Rating: ****
CFC $4.25 Down +0.00 +0.00%
ETFC $27.32 Down -0.27 -0.98%
E*TRADE Financial… CAPS Rating: ***
LEH $0.13 Down +0.00 +0.00%
Lehman Brothers Ho… CAPS Rating: *
MS $27.46 Down -0.32 -1.15%
Morgan Stanley CAPS Rating: ***
SCHW $30.13 Down -0.51 -1.66%
Charles Schwab CAPS Rating: ****