Finding Higher Dividend Yields with Safety

The Federal Reserve’s been punishing savers in favor of the big banks and others by keeping short-term interest rates dirt low since 2008. Investors in safe investments (such as short-term treasury bills, money market funds, and certificates of deposit) are earning less than 1% annually. After taxes and inflation, the real return is negative. Some savers respond by taking more risk, such as by purchasing high yield bonds.

A better approach is to take a look at checking accounts. High-yield  or reward checking accounts, as they’re called, yield an average of 2.56% annually (compared with 3.3% last year). The highest yield currently is over 6% offered by the Boeing Employees Credit Union in Seattle.  On www.bankrate.com, you can find a survey of the latest details and yields. The web site found 57 high yield savings accounts, and 27 of them are available nationwide.  There are requirements to qualify for these yields.

To earn the top interest rate, consumers generally must meet monthly requirements such as one direct deposit or automated payment and 10 debit-card transactions, according to the study. The required debit-card purchases are the “biggest hurdle,” for consumers, McBride said. Savers who don’t meet the requirements in a given month earn an average of 0.11 percent, he said.

Banks also generally limit the balances in a checking account that earn the highest yield. The most common cap is $25,000, while others set it at $10,000 or less.

You won’t find big-name banks on the list. It’s mostly community banks and small local or regional banks. One reason for the rates is the requirement of a minimum number of debit card transactions. The federal government recently limited the fee a card issuer such as a bank can charge for the debit card swipe fee. Small banks with less than $10 billion in assets are exempt from the ceiling. Banks that are subject to the ceiling probably will lower their yields on high-yield checking or increase the required number of debit card uses each month.

Here’s a word of warning from Smart Money:

Because of all the many hoops, Richard Barrington, personal finance expert at consumer information site MoneyRates.com, doesn’t advise people to change their shopping or banking habits to fit the terms and conditions of high-yielding checking accounts. “When you start manipulating your financial habits just to qualify for that kind of deal and start spending more money than you intend, that’s when you can run into trouble,” he says. “It’s not a coincidence that many of the restrictions involve a certain amount of debit card transactions. Banks still make a good amount of money from overdraft fees.”