The CD dilemma – and what to do

By John Nadeau | Feb 13, 2014

If you’re like many retirees, for years you’ve regarded certificates of deposit (CDs) as safe, conservative investments.

But with today’s miniscule interest rates – you’re lucky to get 1 percent for two years – CDs seem like no investment at all, especially after you’ve paid the income tax.

A result is that numerous investors are turning to mutual funds specializing in so-called “defensive stocks.”  These generally provide constant dividends and stable earnings, regardless of the state of the overall economy.

Utilities are a prime example because, in all phases of the business cycle, they provide something that people must have.

Ever hear of a utility going out of business?  That is an extremely rare occurrence.

That’s because even in hard times people need to keep their houses warm (gas in many cases) and to light them (electricity).

Other examples of essential industries are food distribution companies that offer everyday staples like cereal and milk as well as health care organizations that provide medical treatment, pharmaceuticals, and  insurance.

Mutual funds that focus on stocks issued by businesses like these are not famous for spectacular financial results.

The fund managers pick companies that pay steady dividends that may look modest in a booming economy but look great compared with today’s CD rates.

They choose equities that provide decent returns in good times but do not forfeit all their gains should the economy turn sour.

Right now, the American stock market is like a yo-yo. The big picture is a bit hazy, to mix metaphors slightly.

China’s economy is slowing. Despite the bailouts, Europe’s economy is experiencing slow growth. Our own economy is continually a mix of good and bad news.

Now may be the time for you to consider replacing your CDs with mutual funds devoted to defensive stocks. There are good ones out there.

My own choices, the Fidelity Select Utilities Portfolio and the Vanguard Health Care Fund, have performed as I had hoped.  Both are no-load funds, that is, there are no sales charges, and management expenses are low.

There are many more such funds, of course, and perhaps the best thing for you to do is arrange a conference with your financial adviser.  If you are a bit more adventurous, you can do your own research on the Internet.

My own credentials for writing an article like this include 30 years’ experience as a communication director for financial services organizations, including a Fortune 500 company. Along the way, I earned an NASD designation.  For salesmen and the general public, I have written many articles like this one.

Does this make me a Wall Street Wizard? Hardly.  But I do feel confident passing along this information.

One caution: When you’re talking to your adviser, be sure to say “defensive stocks,” not “defense stocks.” The latter refers to companies that manufacture things like jet fighters.

That’s not what we have in mind.

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