A few weeks ago I took at look at ways to make money off of a dividend portfolio. Stocks are great for building up a dividend income stream. You can also build dividend income by investing in CD’s. CD’s pay much lower interest rates than bonds and many dividend paying stocks but the income is guaranteed.

What Is A Certificate Of Deposit?

A Certificate of Deposit (CD) is a fixed income investment for a specified period of time. This time period is usually from 3 months to 5 years. CD’s pay higher interest than traditional savings account. The longer the time period you invest, the higher the interest rate.

The only negative drawback to the certificate of deposit is that you can not access your money for the entire term without penalty. Therefore a CD’s liquidity is not as great as a savings account.

A popular method of investing is CD laddering. A CD ladder is a collection of CDs with different terms bought at regular intervals. The goal is to have them mature at regular intervals. This approach allows you to have a CD that is maturing every year while still allowing the individual investor to take advantage of longer term interest rates.

CD Laddering

An example of this would be buying the following:

If you invested $2,000 in the following 4 CD’s with the corresponding interest rates.

Term         Interest Rate    Amount
1 year CD 1.30%                $500
2 year CD      1.60%            $500
3 year CD      1.80%                $500
4 year CD      2.00% $500
5 year CD      2.40%                $500

These are real CD rates that you could get right now at most financial institutions. (Amazingly just two years ago, you could have gotten 4 percent or more on a certificate of deposit).

Year 1: The 1 year CD would mature this year at a 1.30% interest rate.

Year 2: The 2 year CD would mature the following year at a 1.60% rate. (Interest would accumulate for 2 years)

Year 3: The 3 year CD would mature in the third year at the 1.80% rate. (Interest would accumulate for 3 years)

Year 4: The 4 year CD would mature in the fourth year at a 2.00% rate.(Interest would accumulate for 4 years)

Year 5: The 5 year CD would mature in the fifth year at the 2.40% interest rate. (Interest would accumulate for 2 years)

The investor can either redeem the CD at maturity or allow it to roll over. If the CD is rolled over, it would renew for the same length of a time at the current interest rate being offered.The advantage of this is that an investor is not locked into a low yielding CD rate if rates go higher.

I would not an employ a CD laddering approach right now because they are not an attractive investment to me at these low rates. As soon as rates hit 4% again, I would deploy this strategy.

A CD ladder lets you stay liquid while maximizing the return on your investment dollars.

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