With Interest Rates So Low, Where to Invest?

To the surprise of some inflation-focused analysts, interest rates remain low and look like they will for the foreseeable future. Those low rates have been hard on investors who counted on interest income from their CDs, bank and money-market accounts. For these investors, it's becoming clear they will have to move into riskier assets if they have any hope of improving their returns. But how can investors take on greater risk while maintaining the security of their investment capital?

One possibility is to invest in stocks of utilities, many of which are rock solid financially and pay dividend yields well above the 0.04% interest rate on a typical money market fund. Another option is to buy oil pipeline master limited partnerships that yield 6% to 7%. On $100,000, such an investment can generate monthly income of $583 – much better than the $33 they're getting now.

The utilities are far less complex from a tax standpoint but they have lower dividend yields. Let's consider one such utility, New York's Consolidated Edison (ED). It pays a dividend yield of 4.92% and that figure has grown at a 5.1% annual rate over the last five years. Its operating performance is also pretty solid -- generating $13.2 billion in sales and $947 million in net income over the last year -- growing respectively at 6% and 9.6% five-year compound annual growth rates. The stock has risen 21.3% in the last year, and at a P/E of 14.3, it's a bit expensive compared to its 4.4% earnings growth forecast for 2011.

If a nearly 5% yield is not enough, investors could go further out on the risk/return spectrum and look at oil and gas pipeline master limited partnerships (MLPs) that pay out their substantial profits to their limited partners every year. The bad news about these is that you will probably need to pay a tax adviser to help you with the complex tax reporting requirements, according to MSN. The good news is that these MLPs generate yields in the 10% to 12% range and you don't have to pay taxes until you sell them.

One candidate to consider is Duncan Energy Partners (DEP), which stores and distributes natural gas. It has a dividend yield of 6.31% and its shares have risen 54.2% in the last 12 months. Duncan generated $1.1 billion in revenues during the last year and that figure has been growing at a 5.5% annual rate. Moreover, insiders have been buying during the first half of 2010.

Two years ago, these MLPs yielded 10% to 12%. But now that those yields are down close to what utilities like ConEd are paying, So the latter may be preferable at this point since they do not come with all the tax reporting headaches.