As inflation has climbed to 40-year highs, interest rates have also ratcheted higher. For borrowers, higher rates are not a good deal, as they raise the costs of taking out loans.
For investors, however, higher rates open up opportunities to invest safely and still earn a meaningful return.
Today, let’s talk about an investment product that uses these higher interest rates to let you earn almost twice the yield of bank CDs.
From rates that were nearly 0% a couple of years ago, interest rates have climbed steadily, with a spike higher in recent months. For example, in mid-2020, a 10-year Treasury note yielded just 0.5%. As I’m writing this, that number is now above 3%.
According to the Bankrate website, savers can earn 2.5% to 2.9% on longer-term (three-to-five year) CDs. That’s not too bad for a very safe, no-volatility investment.
Now, I recommend that investors stay away from traditional bond mutual funds or ETFs. This type of fund is managed to hold bonds with a specified average term to maturity. This feature means these funds do not hold bonds until they mature, when the face value is guaranteed.
This structure of traditional bond funds causes fund share prices to go down and stay down when interest rates go up. If interest rates fall, fund investors will see less in terms of dividend income. From my years of investing experience, I can say that the widely recommended allocation of assets to traditional bond funds will turn out to be a very poor investment decision.
The Invesco BulletShares ETFs are a different type of bond fund. BulletShares offer a series of bond funds with fixed annual maturity dates. Investors can pick from bond funds with maturities from one to ten years. Invesco’s BulletShares offer investment-grade, high-yield, municipal, and international bonds.
These ETFs have two great features that make them attractive as a place to invest capital for which you want to preserve the principal.
- If you buy one of the BulletShares ETFs and hold it until the portfolio bonds mature, you will redeem the yield-to-maturity in effect when you purchased the shares.
- The funds pay monthly dividends, which, if reinvested, will add about a quarter-point to your average annual return.
To my Dividend Hunter subscribers, I recommend using the most conservative investment-grade BulletShares and setting up a bond ladder type strategy so that one fund position matures each year. Here is how a current five-year ladder looks:
Note that this BulletShares ladder has an average yield-to-maturity of 4.07%. That handily beats long-term CDs. Since these funds are ETFs, you always have 100% liquidity. However, if you sell before maturity, you may receive more or less than you paid for your shares.
My subscribers like using BulletShares for a stable holding in their portfolios. I provide training on these funds a couple of times a year in The Dividend Hunter – click here to see how you can join in.