Stupid Investments Still Abound

With Wall Street awash in relatively low share prices, now's a great time to invest. But that doesn't mean you won't still run into some investments that simply don't make sense.

A recent issue of our Motley Fool Champion Funds newsletter introduced me to the S&P 500 Capital Appreciation Fund (SSPAX). Like many index funds, it seeks to track the S&P 500, but it also makes investors an interesting promise: As long as you leave your money in it for 10 years, you'll end up with at least 150% of your investment, less fees and expenses. Not bad, eh?

Alas, this investment comes with a bunch of red flags. First of all, those fees and expenses eat into a lot of that minimum return. According to a press release from the fund manager, you'd likely end up with a minimum guarantee of just 119% -- that is, a 19% total return over 10 years.

But that's not all. The Capital Appreciation fund's class-A shares also charge a sales load of as much as 5%. That would lop $500 off a $10,000 investment from the get-go. (The sales load starts to drop once you invest more than $25,000 or more.) On top of that, there's an annual expense fee of just more than 1% (for class-A shares). That's in the same neighborhood as many managed stock funds, but remember that this fund is closely tied to an index. You can invest in other S&P 500 index funds with expenses of less than 0.10% annually.

Also, while index funds typically pay their shareholders whatever dividends their underlying stock holdings pay out, the terms of this fund call for those dividends to go to counterparties of swap derivatives instead. In other words, the dividends are part of the price you pay in exchange for the minimum guarantee. With the S&P 500 sporting a dividend yield of around 3%, that's $300 per $10,000 invested that you won't get from this fund.

If, after all that, you're still interested because you like the idea of earning at least that minimum 19% total return, think again. Amanda Kish, who advises Champion Funds, pointed out that it translates to an average annual return of just 1.75%.

You can do better
That rate doesn't even compare well with some FDIC-guaranteed bank certificates of deposit, where you can find yields greater than 2% for one-year CDs, and more than 3.5% for five-year CDs. And that's with interest rates currently at extreme lows; rates may rise in the future after your initial CDs mature.

Of course, a CD has no chance of price appreciation. But plenty of dividend stocks offer both current yields well above 1.75% and the potential for future appreciation. So if you're willing to take on a little more risk, and forgo guaranteed results, you should really take a closer look at dividend-paying stocks. Check out these recent yields offered by companies that sported four- or five-star ratings (out of five) from our Motley Fool CAPS community:

Data: Motley Fool CAPS.

Sure, a CD offers that all-important guarantee, while these stocks don't. But you can be fairly certain that some companies, such as PepsiCo or Kraft, aren't going anywhere anytime soon. Invest in them, and you can expect a regular dividend -- plus some stock price appreciation, which in some cases can be considerable. McDonald's, for example, has averaged 19% growth each year over the past five years. That beats the heck out of a 19% total return over a decade.

Even though the big drop in stocks has revealed some great opportunities, this fund isn't one of them. You can definitely do better.

Further investing insights and ideas:

• 10 Dividend Stocks for the Next Decade and Beyond
• Rescue Your 401(k)!
• Don't Buy Into These 3 Investment Myths