Investors are scrambling like football quarterbacks, almost desperately trying to pin down acceptable interest rates as they see their bank and S&L savings earn less and less interest. Certificates of deposit, once the darling of conservative savers, are now being shunned by many because the returns are just too disappointing.
CDs are yielding from about 5.25 percent to a high of about 7 percent for a 7-year one. The 1-, 2- and 3-year C's favored by most savers are giving them about 6 to 6.5 percent interest. These are not very enticing yields, especially as the money has to be locked up for a relatively lengthy period.
What else is available to provide the saver with a better, and likely more liquid, return on his money?
Most savers seeking alternatives look in the direction of mutual bond funds. While these offer a better return, the saver may be concerned that the principal fluctuates, which it doesn't do in a CD. Surprisingly, though, some of the bond funds have fluctuated very little in the past year, a period when interest rates in general have tumbled.
Mutual funds often tend to answer inquiries on how their funds have performed during a period by citing so-called "total return," which includes share price gains or losses and is misleading because share price movements are uncertain.
Edgy stock investors may not be happy with stable prices but conservative investors are. Take, for example, the T. Rowe Price high-yield tax-free bond fund. Its yield of more than 6.9 percent compares with the best that CDs have to offer. The CDs are taxable by both federal and state governments, but only Maryland tax cuts into the return from the bond fund, which is federal tax-free. A Price Maryland municipal bond fund yields about 6.05 percent and that's fully tax-free to state residents.
The stability that CD investors seek is available in the bond funds. The Price high-yield tax-free fund has fluctuated only 3 percent from this year's high of $11.69 to its low of $11.33. The same kind of tiny price movement occurred in prior years. The Maryland bond fund has a high this year of $9.82 a share and a low of $9.45. The narrow range is evidence of very little risk.
Comparably, a Price Ginnie Mae fund yields 8.16 percent and has a high-low swing this year of only 4 percent. A U.S. long-term bond fund, taxed federally but not by Maryland, has a yield of nearly 7.6 percent but a bigger price fluctuation of about 6 to 8 percent.
The Calvert Group in Bethesda offers a more than 7.5 percent yield from its S.E.C. fund, and Baltimore-based Legg Mason's investment grade corporate bond fund returns about 7.25 percent.
It's obvious that bond funds are out-yielding the interest-paying vehicles of banks and savings and loans, but still another alternative to the banks and S&Ls is stocks. But one should be very careful in selecting them. In doing so, keep in mind that stocks of well-managed, growing companies tend to increase their dividends and that should play a part in the choice made. Also keep in mind that stock prices fluctuate much more than prices of bond funds.
Among possible selections for good and secure yields from stocks are Federal Realty of Bethesda, (yielding 7.7 percent); Delmarva Power & Light (7.6 percent); Citizens Bancorp of Laurel (6.7 percent); Baltimore Gas & Electric (6.5 percent), and Bell Atlantic (5.6 percent).