Quick Takeaways
- While CDs provide a solid return, there might be juicier opportunities out there.
- Dividend stocks and bond funds often serve up better yields.
- Your appetite for risk and investment timeframe should guide your picks.
When it comes to parking your cash safely and still reaping some earnings, the certificate of deposit (CD) often comes to mind. Unlike a plain old savings account, a CD usually rewards you with a heftier interest rate—assuming you’re cool with locking your money away for a fixed term. Just remember: cashing out early usually means taking a hit via penalties.
Depending on what you want to achieve financially, how long you can leave your funds untouched, and how much uncertainty you’re comfortable with, CDs can fit the bill. Still, if you’re hungry for heftier returns, it pays to explore some other routes.
5 Savvy Moves to Outsmart CD Yields
- Banking on dividend-paying stocks
- Slashing pricey debt
- Diving into peer-to-peer lending
- Putting money in bond funds
- Stashing cash in high-yield savings accounts
1. Dividend-Paying Stocks
Some companies like to share their bounty by handing out portions of their profits to shareholders on the regular. For instance:
- Home Depot (HD)
- Starbucks (SBUX)
- Procter & Gamble (PG), boasting a jaw-dropping streak of 68 consecutive years increasing dividends
While these stocks can dish out dividends that surpass CD interest rates, they come with the flip side: your initial money isn’t guaranteed. Picture buying a share at $20 and seeing it dip to $15 after half a year — it happens.
Kimberly Foss, a seasoned financial planner with Mercer Advisors, points out that because stocks carry inherent volatility, it’s vital to gauge how much risk you’re ready to stomach. Though short-term swings can be nerve-wracking, the gamble tends to mellow out over longer stretches. That’s why holding onto stocks for anywhere between three and eight years often smooths out bumps.
Financial pros generally caution against betting everything on single stocks. Mari Adam, founder of Mari Talks Money and a certified planner, advises spreading bets across a handful of stocks and other assets to sidestep unnecessary risks.
“No one should stash all their short- or mid-term cash in just one stock or asset class,” Adam remarks.
Remember, investing is a marathon, not a sprint. It’s about tuning out market noise and zoning in on your ultimate goal.
“Stay laser-focused on your target. Don’t let daily market jitters or your statement’s snapshot throw you off course—that’s a one-way ticket off your investment path,” she adds.
2. Tackling High-Interest Debt
Sometimes, boosting your financial returns doesn’t mean buying stocks or bonds — it starts by obliterating costly debt hanging around your neck.
Carrying a credit card balance charging 20% interest monthly? You’re practically handing over money that outpaces any CD yield. Using cash to crush that balance is a smarter play than parking it in a low-risk vehicle yielding 3 or 4% annually.
Bill Hammer Jr., president of Hammer Wealth Group in Nashville, Tennessee, recommends focusing on wiping out debts with triple-digit interest rates first — mortgages and car loans might be tolerable, but credit card debt is a different beast.
3. The Peer-to-Peer Lending Route
Peer-to-peer lending (P2P) offers a quirky yet potentially rewarding gateway for those comfortable taking modest chances. Platforms like Prosper facilitate lending directly to individuals, letting investors pocket decent annual returns.
According to Prosper’s own stats, individual lenders can snag average yearly yields around 5.3%.
You can pick borrowers from risk tiers based on credit scores. Just like banks, higher risk means higher interest paid to you. To keep things safer, Foss suggests aiming for borrowers sporting AAA-grade credit.
“Don’t toss your entire cash pile here, but pairing P2P loans with dividend stocks and short-term corporate bonds could create a balanced, diversified mix,” Foss advises.
4. Bond Funds
If CDs aren’t cutting it, bond funds offer another path. These funds pool together bonds maturing in similar timeframes—think 1- to 3-year periods—and span a variety of issuers, from foreign governments to utility companies and corporate entities.
Dipping into international bond funds can expose you to AAA-rated sovereign debt and blue-chip enterprises. For the adventurous, emerging market bond funds exist but come with bumpier ride risks.
Before diving into bonds, educate yourself thoroughly to navigate the myriad options wisely.
5. High-Yield Savings Accounts
High-yield savings accounts, like CDs, benefit from FDIC protection—up to $250,000 for individuals or $500,000 for joint accounts—making them a safe harbor with a more liquid twist. If short-term returns and easy access are your jam, these can be solid contenders, especially in a climate where interest rates fluctuate.
Though CDs typically boast higher yields, exceptions do exist. Some banks dish out competitive rates, and during times when rates dwindle, high-yield savings accounts might just edge CDs out. That said, unlike CDs’ locked-in rates, returns here aren’t guaranteed.
CDs vs. Money Market Accounts vs. Roth IRAs: Where to Park Your Cash?
| Certificate of Deposit (CD) | Near-term savings goals | Risk-free, fixed returns |
| Money Market Account | Those needing quick cash access | Flexibility |
| Roth IRA | Long-term retirement savers | Tax-free growth and withdrawals |
Online financial firms currently offer money market accounts hovering around 4.3% interest, whereas traditional bank offerings often slip below 1%.
CDs make sense for stashing money earmarked for a near-future expense. But for building a nest egg to last decades, retirement accounts like Roth IRAs are the smarter choice.
A word to the wise: if you’re chasing higher returns and cool with a dash more risk, options beyond CDs abound. These include municipal bonds, short-term bond funds, and dividend-paying stocks—some ventures even promise double-digit yields depending on your strategy.
When setting sights on long-term growth, CDs rarely shine as the star.
David Sterman, CFP and head of Huguenot Financial Planning in New York, sums it up:
“If you won’t be tapping those funds for several years or more, CDs aren’t usually your best bet. Longer-term bond-based investments consistently deliver juicier yields.”
Frequently Asked Questions
Are CDs still worth considering?
CD rates have climbed to their highest in recent years. But as inflation eases and the Fed starts easing rates, these tasty yields might not last forever. It’s smart to shop around, especially online, where some of the best deals lurk.
Do CDs make sense for retirement savings?
For younger investors, CDs are often too tame to outpace inflation or grow wealth. Stocks usually offer a better ride. But once retirement arrives, CDs can complement your portfolio as a low-risk income source.
Are CD earnings tax-free?
Interest accrued on CDs is taxable income, similar to interest from savings accounts. The tax you owe depends on your tax bracket.
— Article updated with contributions from Maurie Backman.
Editorial note: All readers should perform their own thorough due diligence before deciding on any investment strategy. Past performance is not a reliable indicator of future results.
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