The most recent rate cut from the Federal Reserve turned a market freefall into a melt-up for financial stocks and a big bounce for stocks in general. But while many investors have breathed a big sigh of relief, savers are paying the price.
A large group of investors, especially retirees who rely on their savings to pay living expenses, have already started to feel the effects of lower interest rates. Treasury bill rates have plummeted from 5% to below 2.5%. And although CD rates initially bucked the downward trend, they're now finally catching up. According to Bankrate.com, rates on one-year CDs have fallen more than a full percentage point in the past six months, to below 4%.
Bailing out the banks
The fact that banks are finally passing along lower CD rates to consumers is great news for their balance sheets. You've seen those benefits reflected in their stock prices, as US Bancorp (NYSE: USB) is up 20% from its lows just a couple of weeks ago, and Washington Mutual (NYSE: WM) has risen 36% in the last week alone. WaMu is paying just 2.65% on one-year CDs.
Unfortunately, the usual strategies of dealing with lower rates aren't working well in this rate environment. For instance, buying longer-term CDs often can get you better rates. But US Bancorp's promotional rate on a 35-month CD is just 3.1% -- only 0.1% higher than its rate for a five-month CD.
In fact, many banks, including subsidiaries of E*Trade Financial (Nasdaq: ETFC) and Countrywide (NYSE: CFC), offer significantly higher rates for short-term CDs than they pay on CDs with longer maturities.
What you can do
For the time being, the days of easily finding ways to earn 5% on your savings are over. However, it's worth looking around to find stragglers who've been slow to cut rates. For instance, Advanta's (Nasdaq: ADVNB) bank unit still offers 5% on five-year CDs.
In addition, you might have better success with your local banks. Many financial institutions, especially credit unions, offer specials that you can take advantage of only if you live nearby or otherwise qualify to participate.
Finally, even though the stock market has been on a wild ride lately, dividend-paying stocks may offer a more stable income stream than savings accounts. Although share prices rise and fall, companies like McDonald's (NYSE: MCD) have increased their dividend payments steadily over time. You'll want to avoid risky dividends that could be cut -- as Citigroup (NYSE: C) and other financial companies have done recently -- but many companies have decades of strong dividend history.
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