Income Generating Investments - Comparison Chart

Income Generating Investments - Comparison Chart

The chart below provides a quick comparison of several different asset classes that produce income for investors. It includes assets deemed to be almost totally safe, such as FDIC-insured savings and CD accounts and U.S. Treasury Securities, to assets that introduce more risk, such as dividend stocks.

Updated: December 11, 2019

INVESTMENT Advantages Disadvantages Best Current Interest Rate* Risk to Principal Tax Attributes

Savings or money market accounts

Many accounts require only $1; very liquid.

Transaction costs; no guarantee of rate stability if short term rates decline.

Rates as high as 2.30% in nationally available online accounts.

For FDIC insured banks, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Fully taxable in the year of accrual.

Certificates of Deposit

Provides a guarantee of income should short term rates fall. Rates for longer term CDs are higher than savings accounts.

Not liquid for term of CD (without significant penalty).

APY rates may be slightly higher than online savings accounts for terms of 1-year and longer.

Top-yielding online 1-year CDs pay 2.25% APY. Some online 2-year CDs pay a little more.  Local rates at banks and credit unions near you may be higher.

For FDIC insured banks, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Fully taxable in year of accrual.

Federal Credit Union Accounts

May be operated similar to online savings accounts or CDs

Often difficult to find a FCU for which you qualify with the products you want.

Depends on particular FCU but savings rates are ordinarily higher than big banks, but lower than online savings rates.

CD rates, also called "time deposit" rates, are often better are comparable to rates at online banks and local banks.

For NCUA insured credit unions the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Fully taxable.

Fully Taxable Money Market Funds

Usually very liquid.

Rates have recovered over the course of 2018 and 2019, but in general are less sturdy than savings rates in rising rate environments and fall more quickly when short-term rates fall.   

Retail funds generally around 1.40%, although Vanguard and Fidelity current have funds yielding over 1.70%. Main value is to ultra high net worth individuals, corporations, and not-for-profits that have asset bases too large to disperse to savings and money market accounts.  Most individuals obtain higher rates in FDIC-insured banks and NCUA-insured credit unions. 

Not insured. Although very rare, principal invested may fall below par ("break the buck").

Fully taxable in the year of accrual.

Tax-Free Municipal Money Market Funds

Usually very liquid; most beneficial to those in the higher federal and state tax brackets.

Even if tax advantages are fully utilized by high earning individuals, the effective return is below fully taxable alternatives.

Approximately 1.00% in yield for funds geared to a 10-year duration. For investors in the highest federal tax bracket (35%) who are residents of high tax states may be equivalent to a fully taxable yield just under 2.00%.

Although very rare, principal invested may fall below par ("break the buck"). The US Treasury has backstopped this through guarantees on occasion (most notably when it guaranteed that the principal deposited in qualifying 2a-7 funds as of September 19, 2008 would be insured for one year).

Fully tax free provided that you are a resident of the appropriate state for the entire year.

US Treasury Securities

Very liquid

May decline in value if interest rates rise

Differs according to duration. Compare Treasury rates.

Currently 1.80% for 10-year Treasury.

 

Not subject to state and local taxes.

Series I Bonds

Relatively high yields; strong protection against inflation even where short term interest rates do not rise

Absolutely not liquid for 1 year; penalty of 3 month interest forfeiture if redeemed in fewer than five years. Maximum purchase is $10,000 per calendar year per individual in electronic format (may also purchase up to $5,000 per year using a Federal tax refund.

2.02% for new bonds through April 30, 2020, reset bi-annually based on CPI-U thereafter.  Not recommended until fixed rate component becomes significantly higher than its current rate of 0.20%.

No risk to principal; backed by US Full Faith and Credit.

Not subject to state and local taxes. Since interest accrues, federal tax is deferred until redemption.

Treasury Inflation Protected Securities

Like all US Treasuries (except I Bonds), very liquid; strong protection against inflation due to link to CPI-U

May lose value if interest rates rise and inflation (as reflected in the CPI-U) does not rise as quickly

Approximately 0.25% on the 10-year TIPS.

 

No risk to principal if held to maturity; backed by US Full Faith and Credit; may trade at values significantly below par before maturity

Not subject to state and local taxes. Interest is fully taxable in the year in which it is paid. Phantom interest is taxable in the year in which the bond's principal appreciates in accordance with changes in CPI-U.

Agency Bonds

Usually very liquid. Benefits are greater for those holding state and local tax exempt agency bonds in highest tax brackets of highest taxing states. Callable agencies may offer a substantial yield premium over other short term securities.

Longer term agency bonds may lose value very quickly if interest rates rise and bonds are not called.

Long-term callable state and local tax-free bonds with 2.50% coupons are trading, but may trade below par value if rates rise before bond is called.

Risk to principal may exist; may trade at values significantly below par before maturity.

Certain agency bonds are not taxable at the state and local level; interest is federally taxable in the year that it is paid.

Municipal Bonds, including Pre-Refunded Municipal Bonds

Yields often exceed after tax yields for taxable bonds and cash equivalents for investors in highest feeral and state tax brackets.

Even the shortest term bonds may lose value if interest rates rise.  Unless tax advantages are fully utilized by high earning investors, these bonds will underperform fully taxable savings accounts and CDs.

Current average 10-year yields on AAA-rated bonds are trading around 1.20%, which is can deliver an after-tax equivalent just over 2.00% for high net worth investors in the highest federal and state tax brackets.

Default risk (risk to principal) exists (mitigated for pre-refunded municipal bonds); may trade at values significantly below par before maturity.

Usually not federally taxable, and usually state tax free to residents of the issuing state.

Dividend Stocks

High quality Dow Dividend Stocks can offer yields between 1-5%.

Stocks price can drop and investors can lose principal.

1-5% yield.

Investor can lose all of their principal.

Tax rate on qualified dividends is 0% to 15%. To be a qualified dividend, investor must "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date."

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