Personal Finance

Instead of Dividends That Barely Pay, Look At A HYSA Instead

Maurie Backman

Published: January 6, 2025 11:10 am

Key Points from 24/7 Wall St.

• The average dividend yield of an S&P 500 company is less than what savings accounts are paying today.
• Given that the index is up around 24% over the past year, it’s a good time to cash out gains and boost savings.
• Also consider a CD ladder for more guaranteed income.
• The best high-yield savings accounts are paying way more than most Americans realize, with some offering cash bonuses for new accounts. Click here to see our top pick today. ^(Sponsored)

If you’re someone who’s heavily invested in S&P 500 stocks, then you’re probably pretty happy with the state of your portfolio now compared to a year ago. As of this writing, the index is up almost 24% from the start of 2024, and a lot of people are sitting on glorious gains.

Of course, the beauty of investing in S&P 500 stocks is not just getting to benefit from share price appreciation, but also, getting to pocket extra payments along the way in dividend form. But if that’s been your strategy to date, you may want to make some changes for 2025.

Time to take your gains and run?

You’ll often hear that the best approach to investing is to buy shares of strong companies and hold them as long as possible so they gain the maximum amount of value – and, while you’re at it, enjoy your fair share of dividend income. But based on market conditions today, that may not be the best approach for 2025 — not if generating steady income is a big goal of yours.

Now if it isn’t, you can ignore what I’m saying and keep your money in the S&P 500. But if you have a specific need for predictable income in 2025, then I’m going to tell you that it may be time to cash out some of your stocks and pump more of your money into a savings account.

The S&P 500 is super inflated right now, which means a correction in 2025 isn’t out of the question. Now if you’re years away from retirement or whatever it is you’re investing for, a correction shouldn’t rattle you. But if that’s not the case, consider cashing out a portion of your portfolio now, while it’s up.

Furthermore, if you’re reliant on your portfolio of S&P 500 stocks to generate income, you may want to reconsider your strategy. As of October 2024, the average dividend yield of S&P 500 companies was only 1.25%, reports Schwab. By contrast, a lot of high-yield savings accounts continue to offer rates at or around 4%. And that’s without taking on the risk of owning stocks.

Remember, if you bank somewhere FDIC-insured (which isn’t a hard thing), you get protection on up to $250,000 in cash. Any interest you earn on that is a risk-free return.

It’s not just a matter of peace of mind

You can argue that cashing out some S&P 500 gains and putting that money into the bank is playing it safe. That’s not wrong. But peace of mind isn’t the only reason to consider loading up on cash right now. When you compare the typical S&P 500 company’s dividend yield to what a good savings account is paying right now, savings accounts come out on top. So if you want or need predictable income, that’s a smart bet.

For even better predictability, you may want to consider a CD ladder. For example, you may want to go with a 3-month, 6-month, 9-month, and 12-month setup to take advantage of today’s strong CD rates while maintaining flexibility with your money. Or, lock in some longer-term CDs while rates are still solid.

To be clear, I would not suggest relying on a savings account or CD ladder to grow your retirement nest egg. My advice applies to people who are looking for income in 2025 — for example, retirees or people who are on the cusp of quitting the workforce. But if you fall into these categories, it’s a good time to put dividends on the back burner and focus on cash instead.