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The Fed ate my savings!

chart_ws_bond_10yearyield.top.pngThe 10-year Treasury yield has plunged as investors worry about the economy. The Fed's plans to buy more bonds to keep rates low is also having an effect. By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- If you are a responsible saver, the Federal Reserve isn't doing you any favors.

The Fed unsurprisingly left a key short-term rate near 0% Tuesday, meaning that rates on money-market accounts, CDs and other savings products are likely to remain as anemic as they've been for the past two years.

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But the Fed is hurting those who look to Treasury bonds and notes for a steady yield as well. The central bank, acknowledging that the economic recovery is losing steam, also said Tuesday that it was planning to purchase more long-term Treasurys in order to keep those rates low.

The yield on the 10-year is now hovering around 2.71%, its lowest level since April 2009.

Of course, Ben Bernanke and his merry band of policy makers aren't vindictively singling out savers to punish.

The Fed has good reason to do its best to try and keep short-term and long-term rates low in order to prevent what seems to be a sluggish recovery from becoming something much worse, i.e. a deflationary double-dip recession.

Still, it's unsettling that just as more consumers have finally woken up to the fact that they should be putting away more money for that proverbial rainy day, there is little financial reward for doing so.

What's an income-hungry investor to do then? Stocks that pay healthy dividends may now be a better way to chase yield. Of course, there are some drawbacks.

"You have to get creative. Bonds and CDs are not earning you much so dividend payers are a nice way to get you some income," said Andrew Fitzpatrick, director of investments with Hinsdale Associates, a money manager in Hinsdale, Ill. "But you have to be careful because there are still a lot more risks with stocks over bonds."

Some companies pay what may seem to be reliable dividends. But dividends are often the first thing to get cut during times of crisis. Just ask shareholders of BP (BP) or most big banks.

Fitzpatrick said a less risky way to bet on dividend payers is with mutual funds and exchange-traded funds. He recommends the Aston/River Road Dividend All Cap Value fund as well as the SPDR S&P Dividend ETF (SDY), which owns the highest-yielding stocks in the S&P 1500 universe. (That's the S&P 500 plus the 400 companies in its MidCap index and 600 companies in its SmallCap index.)

Fortunately, there are also plenty of solid blue chip companies out there that pay solid dividends and are boosting them on a regular basis too.

Insurer Aflac (AFL, Fortune 500) (quack quack!) announced Wednesday morning that it was raising its dividend by 7%. That would put Aflac's yield at about 2.4%, higher than the average for the S&P 500. And last month, General Electric (GE, Fortune 500) increased its dividend by 20%. GE now yields nearly 3%.

You can do even better with some other companies. Telecoms Verizon (VZ, Fortune 500) and AT&T (T, Fortune 500), while not exactly sexy growth stocks anymore, are relatively safe, stable companies. Ma Bell and Verizon pay dividends that yield over a whopping 6%.

What's more, companies that pay rich dividends have begun to outperform the broader market lately.

The top four performing sectors of the S&P 500 so far this month are ones that are typically high-yielders: telecom, utilities, energy and health care. That shows just how desperate for income many investors have become.

"The move into telecoms and other dividend payers is a sign of more people seeking and hunting yield because you can't get it anywhere else. As long as long-term rates move lower, we'd expect this trend to hold," said John Kolovos, co-head of technical research with Concept Capital in New York.

Of course, it doesn't hurt that the aforementioned sectors, particularly health care, are classic defensive groups that tend to hold up better in a sluggish economy.

But Kolovos said he doesn't think investors are necessarily buying these stocks because of fear about the recovery. It really boils down to a desire to eke out any return that may be better than bonds.

"We've spoken to a lot of people that are frustrated about the zero yield they are getting in other conservative investments," Kolovos said.

As long as the economy remains fragile and the Fed sticks to its guns on keeping rates low, that frustration is probably going to last.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, La Monica does not own positions in any individual stocks.  To top of page

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