It's hard to find surefire ways to earn a significant return on
your money these days. Many bank accounts are paying less than 1%
interest, for example, and one-year CDs aren't offering much more
than 1%. Still, if you have a mortgage, you can earn a lot more on
your money with no risk whatsoever. But is even that return enough
-- or should you try to do even better than that by taking on more
Hiding in plain sight
Paying down your mortgage gives you a guaranteed return. If you're
paying off a home loan with an interest rate of 5%, and your terms
permit you to make extra payments, you're all set. Send in an extra
$1,000 with your next mortgage payment and you'll forgo paying the
5% interest on that $1,000. That money will stay with you,
effectively giving you a 5% return. If your interest rate is 6% or
more, you'll be enjoying a heftier return.
Another benefit of this strategy is that you'll pay off your
loan sooner. A 30-year mortgage can end up with a life of just 20
years this way, without your ever having to refinance. (If your
current loan doesn't permit prepayments, consider refinancing into
a loan that does -- perhaps a shorter-term one.)
Consider the alternatives
The surefire return isn't a complete no-brainer, though. There's a
downside in the form of your opportunity cost. When you prepay your
mortgage with $1,000, you're passing up other ways to invest that
One kind of stock you might consider is the
solid dividend payer
. Some companies currently yield more than 5%. Mortgage REIT
) , for instance, has a yield topping 14%, while
's(Nasdaq: SCCO) forward yield tops 6%. That beats the 5% mortgage
approach handily, though it's not guaranteed. You'll want to study
each candidate enough to be confident in it. Chimera might suffer
when interest rates start rising again, but even if its yield is
halved, it will still be compelling. Southern Copper's fortunes are
tied to the price of copper, but demand for the metal is likely to
grow as the world economy picks up.
Other companies may offer lower yields, but many are
boosting those payouts significantly
each year. Here are a few well-regarded examples to look into:
5-Year Avg. Dividend Growth Rate
New York Community Bancorp
Data: Motley Fool CAPS.
*Growth rate since spinoff of international division in 2008.
Altria's dividend growth rate has been steady since spinning off
its food and international tobacco divisions. Sysco and Nucor,
supplying restaurants and other businesses and cranking out steel,
both stand to benefit from our global economic recovery. New York
Community Bancorp, with low debt, has been acquiring other banks.
It didn't need or accept any TARP money.
These kinds of
promising dividend payers
can give the mortgage-prepayment strategy a run for its money --
especially if you diversify your money between them, reducing your
Finally, while dividend payers ideally offer steady dividend
payouts as well as stock-price appreciation, other terrific stocks
, and, potentially, lots of it. Below, for example, are some
companies with strong expected growth rates over the coming five
5-Year Est. Avg. Growth Rate
JA Solar Holdings
Data: Yahoo! Finance.
These kinds of companies can perform well for you, with earnings
growth easily topping 5%. You just have to accept some risk along
with the potential reward. Some may flame out, which is why you'd
never want to put too many of your eggs in any of these baskets.
Solar energy seems here to stay, for example, but it's not yet
clear which companies will be the biggest long-term winners. Note,
though, that these companies are not all highfliers involved in
brand-new technologies. Visa is a credit card giant, while
UnitedHealth is a major health insurer. Both are businesses likely
to last a long time.
It's all up to you, your risk tolerance, and your needs. Instead
of just letting your long-term money languish in a bank account or
CD, you can earn some solid returns, whether you prepay your
mortgage, invest in dividend payers, seek out fast growers, or opt
for a combination of these strategies.
One guy who's been earning way more than 5% for a long time
is Warren Buffett. Read the Fool's new special free report, and
you'll find three stocks that would make his mouth water.
and see them for yourself today.
Longtime Fool contributor
owns shares of Intuitive Surgical and iRobot. Sysco,
UnitedHealth Group, and Visa are
Motley Fool Inside Value
recommendations. iRobot and Intuitive Surgical are
Motley Fool Rule Breakers
selections. Nucor and UnitedHealth Group are
Motley Fool Stock Advisor
picks. Sysco is a
Motley Fool Income Investor
Motley Fool Options
has recommended a diagonal call position on UnitedHealth
Group. The Fool owns shares of Altria Group, Nucor, and
UnitedHealth Group. Try any of our Foolish newsletter services
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