Investing: Which Way Should You Turn?

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Giant oil companies are a good defensive buy in today's economic environment.
Giant oil companies are a good defensive buy in today's economic environment.

Here are some rock-solid investments that will keep your money safe during difficult times.

 

It is a troubling time for investors, with both the economy and the stock market seemingly in a relentless decline. Many investors are fleeing the turmoil, moving to super-safe United States Treasury bonds.

 

But Treasuries provide only modest returns. For better results, consider the following rock-solid investments that are suitable for even the most conservative investors. 

 

Bank certificates of deposit

Guaranteed by the Federal Deposit Insurance Corporation, CDs are as safe as Treasuries. Yet at a time when five-year Treasury bonds yield only 2.8%, it is possible to find comparable CDs yielding more than 3.9%. The gap between Treasuries and CDs is wider than normal because of the market turmoil. Suffering losses from mortgage defaults, banks are struggling to raise new capital. To attract deposits, the institutions have raised yields on CDs.

 

But be aware that there are some tax differences between Treasuries and CDs. Municipalities can tax income from CDs, but states and cities can not touch Treasury interest payments. Because of the tax issues, CDs are particularly attractive in low-tax states, such as Florida and Texas.

 

Investment-grade corporate bonds

In recent months, corporate bond markets have been shaken by the troubles facing mortgage securities. Investors have been dumping corporate bonds of all kinds. To attract buyers, bond yields have been rising—even for high-grade issuers that are unlikely to default. Issues from such solid companies as Home Depot and UPS now yield more than 5.8%.

 

To diversify your risk and allow a pro to pick the bonds, consider using a mutual fund. For most investors, the best choice is an intermediate-term bond fund that has an average credit quality of A or higher. A top choice is Dodge & Cox Income. The fund currently has two thirds of its assets in bonds that carry the top rating of AAA. The fund owns high-grade corporate bonds from issuers such as AT&T. Because of its cautious approach, Dodge & Cox has not had a losing year since 1999, when it declined only 1%.

 

Another strong choice is Fidelity Total Bond, which has an average credit quality of AA. The managers avoid risk by staying broadly diversified, avoiding big bets on any one security or industry. The fund currently yields 5%.

 

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