What is the best way to invest money right now? I wish I had a crystal ball and could tell you for certain, but I can’t. However, I can certainly make some educated decisions on where I plan to invest my money over the next year.
In the past, I have been a huge fan of investing my money in certificates of deposit. These accounts can provide a great source of passive income with the guarantee that your money will be safe – no matter what happens in the economy. This security has been important to how my family invests its savings.
As interest rates continue to decline, investing in a certificate of deposit is becoming less attractive compared to other options. I recently decided to move some of our money out of CD’s and into dividend stocks in order to increase my return on investment. I have compared renewing a recently expired CD with investing in a dividend stock below.
5 Year Certificate of Deposit – Renewal
Just over a year ago, I built a CD ladder that included 5 equal investments of $1,200 each. The combined $6,000 investment was built by investing in the following certificate of deposit accounts –
- 1 Year – 1.50%
- 2 Year – 1.75%
- 3 Year – 2.00%
- 4 Year – 2.25%
- 5 Year – 2.50%
At the time I opened these accounts, the combined average return on investment was 2.0% per year. This means I was guaranteed $120 of earned interest income for my $6,000 investment. While certainly nothing that will make me rich, a 2.0% guaranteed return in this market was not too bad.
Once the first CD in my ladder expired a few months ago, each of the other accounts moved up one rung on the ladder. The original plan with my expired CD was to reinvest it back into a 5 Yr. account to keep the ladder moving. If I were to have reinvested the initial $1,200 investment back into a new CD, the ladder would have looked like this.
- 1 Year – 1.75%
- 2 Year – 2.00%
- 3 Year – 2.25%
- 4 Year – 2.50%
- 5 Year – 1.75%
Even though a new 5 year CD would return less than before, my new average yield would have increased to 2.05%. This is one of the advantages of investing your money into a CD ladder. But is it the best way to invest money right now?
While I could have certainly kept reinvesting my money into my CD ladder, earning under 2% on a 60 month investment seems ridiculous. Instead of continuing to build my ladder, I decided to invest my funds in dividend paying stocks.
CD Ladder vs. Dividend Income Stock
Reinvesting my $1,200 back into my CD ladder would have given me a 1.75% return on my investment. Over the course of 12 months, that would equal about $21 in earned interest on my initial investment. Even thoug the $21 return would have been guaranteed, along with my initial investment ($1,200) – I know I can do better. I am tired of earning such a small return on my money, so I decided to use these funds to invest in dividend paying stocks.
Dividend Income Stocks
I decided in January to take my money out of the CD ladder and invest in a blue chip dividend stock. I used my $1,200 investment to purchase Shares of Conoco Phillips instead.
There are two advantages of investing in dividend stocks compared to a CD in a low interest rate environment.
- Capital Gains – A dividend paying stock can provide an investor with capital gains in the event they sell their shares for more than the purchase price. Shares of Conoco Phillips were recently trading at over $6 more than my purchase price. The increase in share price has resulted in a unrealized gain on my investment of more than $100! While there is no guarantee of capital gains from buying stocks, there is a good chance of it when you buy the best dividend paying companies.
- Higher Yield – In a low interest rate environment, dividend stocks can pay a significantly higher yield than a CD. For example, investing my money into a new 60 month CD would provide a 1.75% yield. The current yield for shares of COP are at 3.50%. Since the share price of COP is much higher than what I paid, my yield on cost is actually 3.78%. Again, no yield is guaranteed but there are ways to limit ones risks when investing in dividend paying stocks.
Best Way to Invest Money Now – Dividend Stocks
I recently posted that the best source of passive income to be dividend stocks, especially in this economy. While there is certainly no guarantee when investing in dividend stocks, the reward can be much greater than putting your money in a certificate of deposit or savings account. Disciplined income investors use tools like automated investment plans, direct stock purchase plans, and dollar cost averaging to build diversified portfolios of income stocks which limit many risks in the market.
What type of investment would you prefer? A guaranteed 1.75% return on a investment? Or one that could return a yield of 3.5% or higher and the possibility for capital gains over time? What is your favorite way to invest money?