6 Ways to Find Returns When Interest Rates Are Zero

As the Federal Reserve continues to flood the system with credit, safe returns have become elusive.

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The Federal Reserve is still transfusing money into a weak economy, and the patient shows signs of a very slow recovery at best. Despite huge budget deficits, interest rates could remain near zero, making 2010 a challenging year to find low-risk returns on your money. Here are factors to consider as you think about how to employ your investment funds next year.

[See the 10 Strangest Mutual Funds.]

Dividends. Locking in solid dividends by investing in strong companies has become a popular way to capture good yields, as long as you understand that good yields these days are in the range of 3 to 5 percent. If you're concerned about the risk of buying individual stocks, look for dividend-focused mutual funds, but understand you'll most likely be sacrificing some return for that safety.

[See 10 Great Dividend Stocks.]

TIPS. The bond market has had a good short-term run, but that's not expected to continue in 2010. If the Fed finally allows interest rates to begin rising, bond prices will suffer. But if regular bonds are not looking attractive, U.S. treasury inflation-protected securities, or TIPS, remain a good safety play.

Cash. Cash shouldn't be a dirty word in 2010. Locking up your funds in long-term certificates of deposit may be a dubious strategy. Those low returns won't look so good if you wind up missing out on jumps in short-term yields. Being flexible and fluid makes sense in a year that is widely expected to be volatile.

Gold/commodities. Gold is the canary in the mine as far as market psychology is concerned. Watch gold prices closely. They are up more than 50 percent over the past year, with investors enjoying a cocktail of global instability, weakness of the dollar, and concern that inflation will be a serious problem in the years ahead. A Reuters review of investment-firm outlooks shows that most of the smart money thinks gold prices will continue to rise in 2010 and 2011. Of course, the smart money has been wrong a lot in recent years. Still, if you want to do more than watch gold, look at diversified mutual funds holding stocks tied to gold and other communities. Morningstar's Equity Precious Metals funds are up, on average, more than 130 percent during the past year.

Debt. Pardon us for stating the obvious. But unless you're paying nothing for your credit card balances and other debts, this is a terrific time to pay back borrowed money. Paying off a credit card that's charging you 15 percent or higher interest provides a much better return than you'll be likely to find elsewhere.

Higher taxes. The Bush-era tax cuts are set to expire in 2010. Top income tax rates would go from 35 percent to nearly 40 percent. The capital-gains tax rate may rise to 20 percent from 15 percent. Now, it is at least theoretically possible that a government facing years of trillion-dollar deficits will decide to renew these lower tax rates. But many financial advisers are urging their clients to use 2010 as a repositioning year. This means getting ready for higher tax rates, focusing more on tax-exempt and other tax-favored investments, and trying to protect estate plans.