With brokered 6-month CDs yielding 5% or so, why would one choose stocks?
And what is a brokered CD?
Yes, let’s start at the beginning: what is a brokered CD? A brokered CD is a regular bank CD available through a stock broker. Just like you can buy stocks through a broker, you can also buy a bank CD. In fact, there are CDs from many banks available from many brokers.
These brokered CDs are bank CDs. They are FDIC insured just like as if you bought them directly from a bank.
There are several advantages to buying a brokered CD. Firstly, they are FDIC insured up the the insured limit, currently $250,000. Maturities vary, on one case they range from three months to ten years.
Secondly, if you have more than $250,000, you can buy multiple brokered CDs at different banks directly from a single broker, without the need to approach each bank individually.
Thirdly, interest rates on brokered CDs can be higher than a CD you purchase individually from the same bank. Your mileage may vary.
As of this writing, a broker with which I have an account where I have various stocks also has six-month brokered CDs available from 19 different banks. These CDs yield from 4.85% to 5.25%. And for newly issued CDs, there is no commission.
What to choose?
So if my goal is income, why not choose some brokered CDs? A question to explore.
With current interest range rising as a result of inflation and Fed actions, the interest rate in CDs are becoming interesting.
Generally I prefer stocks over bonds or CDs. Dividend stocks not only provide dividend income, they also signify partial ownership in the underlying company. So as the company’s business grows, so does, hopefully, their dividends and the value of the stock.
A CD represents only the amount of my investment in it. Interest accrues, and is usually only payable at maturity for these kinds of short-term CDs. (There are some exceptions.)
Given the volatility in the economy, if I bought a brokered CD, I would only consider a short-term CD. Any longer term maturity would be gambling about interest rates, about which I cannot claim any expertise. I do think that the difference in yields between stocks and brokered CDs might shift again, so this condition where these CD rates are higher than average stock yields might be only temporary.
And there is a small matter of taxes. For reasons obscure, taxes on dividends are lower than taxes on interest. So only if the yield on CDs is noticeably higher than on most stocks would I consider it.
The average yield on the bulk of my portfolio is 2.97%. I also have a smaller batch of stocks where the average yield is 3.75%. Both are noticeably lower than the mentioned brokered CDs which are hovering around 5%.
On the other hand (and there is always another hand…), money in a CD does not compound like dividend reinvestment does for stock dividends. It might seem that way if one rolls over a CD at maturity, but it does not feel the same to me. And I like growing my stock holdings.
So would you consider these kinds of CDs? Let me know here.
The illustration of butterfly eyespots (circular markings that subjectively resemble eyes) is from “Mikroskopische Gemüths- und Augen-Ergötzung” (Microscopic Delights of the Mind and Eyes), published in several volumes from 1764-1768. Courtesy Biodiversity Heritage Library.
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