Is It Time To Lock In Those 5% Interest Rates On Your Cash?

With the Federal Reserve most likely set to issue its first rate cut in September, the quest for income is about to get more interesting. 

This is one reason why The Juice thinks dividend stocks are about to come back into favor. If they haven’t already. 

Over the last month, the broad-market, tech-heavy SPDR S&P 500 (SPY) and the Invesco QQQ (QQQ) ETFs are down about 6.7% and 12.3%, respectively, while dividend ETFs, the Schwab US Dividend Equity ETF (SCHD) and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) are up roughly 2.5% and 3.4% each. 

The Juice has been preparing you for this by focusing heavily on dividends over the last several weeks. Check out our archives to scroll through all of the installments. 

Most recently, we started a new series: The Battle Of The Dividend Stocks, where we put two very different dividend stocks against one another to see not only which one is a better investment, but to provide continuing dividend education. We’ll compare two more dividend stocks in this Thursday’s Juice. 

The basis behind a move back into dividend stocks is that, when the Fed cuts interest rates, savings rates on everything from Treasuries to high-yield savings accounts (HYSAs) to certificates of deposit (CDs) will fall. 

We’re not even mentioning traditional, brick-and-mortar deposit accounts because, aside from a few special offers on checking and savings accounts (often only available to customers with large balances) and CDs, you really need to go with the government or with primarily online banks to get the best, most consistent deals. 

It’s a freaking joke, really. As of mid-July, the national average interest rate on a savings account was 0.45% and CD rates ranged from 0.23% to 1.85%. This data is straight from the FDIC. Meanwhile, a T-Bill gets you closer to 5.0%. 

All of this said, given the Fed decision on the horizon, how quickly will savings rates fall and, subsequently, should you lock in a rate on a long-term CD?

There’s no way to know for sure, but the consensus is that, when the Fed starts to cut, so will the banks. Even the online names. So, the prevailing advice is to lock in long-term CD rates now if you don’t mind having your money tied up. If you do, keep milking the HYSA rates, but don’t expect them to last. And, remember, HYSA aren’t something you can lock in. You have to ride and choose to accept — or not — the ups and downs. 

For the record, the yield on a 10-year Treasury note is already falling. Long down from its April high, last week it dipped just under 4.0%. 

From a historical perspective, in October 2022 when the Fed Funds Rate was around 3.0% (it’s currently at a target range of between 5.25% and 5.50%), treasury yields ranged between 4.0% and 4.5%, depending on the term. When the Fed rate was just over 2.0% in August 2022, treasury yields were to either side of roughly 2.6%. So, stuff happens fast and there’s definitely a discrepancy. 

At the moment, deposit account rates remain high, particularly on 18-month CDs, where you can score north of 5.0% on your money. 

Even big Barclays Bank is competitive (even if not at 5.0% at the moment). Barclays offers a 4.50% and APY with no minimum deposit on an 18-month CD. You can score 4.85% on a 12-month CD. These are a few of the many good deals The Juice found online when we searched. You have likely come across similar high rates. 

Of course, CD and HYSA rates will come down. We agree. However, The Juice thought of something. What did rates at some of the popular FinTech firms look like back in August 2022, relative today. 

The results were interesting, but not super surprising. 

If you go to Betterment’s website today, it puts in bold type so you can’t miss it, a 5% APY offer for its “Cash Reserves” account. We used the Wayback Machine, which lets you look at old, archived web pages, and found that, in August 2022, the same Betterment page didn’t highlight the interest rate on this very same account. It merely touted it as a “smart, secure home for your cash” and, in the fine print at the bottom of the page, listed a 1.6% APY!

Similar, but slightly “better” story at Wealthfront, who pays 5.0% today on its cash account. In August 2022, it only paid 2.0%, but it did put that rate front and center on its web page, noting that it “towers over most banks.”

How about a big bank? CIBC. As of last check, they’re paying out 5.01% on their HYSA. In August 2022, the rate was 1.95%. 

So, yeah. Maybe lock in a CD and start looking at some solid dividend stocks. 

The Bottom Line: We understand that you want to earn meaningful income at the same time as not taking on too much risk. Or, at the very least, you want to balance risk. Maybe you keep some of your money in high-flying tech, some in the broad market, some in speculative stocks and a healthy nest egg in relatively conservative, income-producing investments or accounts. 

The Juice always finds unique ways to explore top-of-mind concerns for savers and investors. Let us know what you care about and we’ll do our best. But expect more on the Fed as rate cuts get closer, including the best ways to save and how to approach dividend stocks in this ever-evolving environment.

• How To Choose Dividend Stocks
• Navigating Market Volatility: The Alt Advantage
• How To Generate Income From High-Growth Tech Stocks
• Check Out The Juice’s Favorite ETF Screener