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Q: What are some good stocks for income production?

A: With rates on CDs, savings accounts, and money market accounts near zero, it is only natural that people should be looking for alternative sources of income. One possibility for this is investing in stocks with a decent dividend yield. However, before taking that step you need to fully come to grips with the substantial risk differential between stocks and savings accounts.

Savings accounts do not fluctuate in value, and they are guaranteed by FDIC insurance for amounts up to $250,000 per depositor. Stocks, on the other hand, fluctuate in value constantly, and some losses can be steep and permanent. So investing in stocks as an income alternative to savings accounts is fine as long as you aren't expecting a comparable amount of stability from the investment. Also, keep in mind that even if you can live with price fluctuations, stock dividends are not guaranteed. In times of financial distress a company may reduce or completely eliminate its dividend.

One way you can reduce risk is through diversification. That means spreading your money across a number of different stocks. This can make the portfolio less volatile than any one stock might be, and it also cushions you against the risk of any one company cutting its dividend. So, to take a diversified approach, you should be thinking about which sectors as a group tend to produce good dividend yields, rather than thinking in terms of individual stocks.

The S&P 500, which is a broad cross-section of large U.S. stocks, has an overall dividend yield of about 2.22 percent. However, some sectors of the S&P 500 produce much more dividend income than others. For example, the dividend yield on telecommunications stocks is 5.32 percent. Other relatively high-yielding sectors include utilities, at 4.02 percent, and consumer stables, at 3.0 percent. In contrast, information technology is the lowest yielding sector, at 1.20 percent.

Naturally, then, one approach you could take is to focus on the higher-yielding sectors of the stock market. As an alternative, Standard & Poors publishes a list of what it calls "Dividend Aristocrats." These are companies within the S&P 500 that have increased their dividends every year for at least 25 years. This list of Dividend Aristocrats would be a good place for you to look for income-producing stocks. There are 51 stocks on the list, which is a broad enough selection to enable you to assemble a reasonably well-diversified portfolio, if you choose to take this approach.

Historically, dividend yields have not generally been competitive with interest rates, so the current situation is something of an anomaly. However, as long as that anomaly persists, it is worth considering stocks for their income production.

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Q: Should I use cash toward paying off my mortgage? I have $150,000 in a checking account earning 1 percent interest. I have $50,000 in stock, and I'm currently putting $2,500 a year into a retirement account. I owe $282,000 on a mortgage at 4.78 percent, and my house is valued at $500,000. My only other debt is a $25,000 car loan. I am 61 years old and single.

A: It's worth looking at the pros and cons of putting some of your savings into your mortgage, along with another possible alternative.

The argument in favor of putting some of the $150,000 in your checking account toward your mortgage is that this would allow you to instantly make up the gap between the 1 percent you are earning on your checking account and the 4.78 percent being assessed on your mortgage balance. So there is a clear-cut savings to be had by lowering your mortgage principal.

On the other hand, your house is already your largest asset, and not a very liquid one at that. You may not want to concentrate any more of your wealth into that single asset -- especially since you are at an age where you should be starting to line things up for retirement. In fact, a key question is whether you see yourself continuing to live in that house in your retirement years. Especially since you are single, you may want to ask whether you would be willing and able to keep up with the maintenance of a whole house in the long term.

The reason this matters is that if you see yourself downsizing your home in the years ahead, it probably isn't a good idea to sink any more money into the mortgage than you have to at this point.

If you do see yourself staying in the home for the long term, here's another alternative you should consider: refinancing to a shorter-term mortgage. At current mortgage rates, you could switch from your existing 4.78 percent mortgage to a 15-year mortgage at around 3.16 percent. The interest savings should be worth your while, and with a shorter mortgage you would be paying down principal more rapidly. This would effectively achieve your goal of putting more money into the mortgage, but in a less drastic way than by putting a lump sum of savings toward your mortgage balance. This more gradual approach provide benefits without reducing your liquidity, which may be a good fit since you are going to need some liquidity upon retirement.

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Q: If the euro comes to an end, what should the holder of a German bank account do with these funds? Will the euros in the account simply be revalued in a new German currency? Would the exchange rate from euros to this new currency be more favorable given Germany's superior financial condition, compared to other countries in the euro zone?

A: Here are two things you can say about this situation:

1. If the dismantling of the euro happens, it will be chaotic.
2. Germany is better prepared than most to weather the storm.

A year ago, dismantling the euro would have been unthinkable, but now Germany has to be seriously considering an exit strategy. Even though Germany has maintained its strong financial position, it has seen its interest rates rise because it is issuing bonds in a tainted currency (i.e., the euro). That gives Germany a strong incentive to find a solution, which may mean kicking some countries out of the euro zone, or going it alone.

Of course, Germany could continue to try to orchestrate a bail-out of the current euro, but if conditions in Europe continue to deteriorate, Germany could see the euro devalued relative to other major currencies. That represents a significant risk to Germany -- and to your euro-denominated account.

In the event of a transition away from the euro, while you are correct about Germany's superior financial condition, this would not mean a favorable exchange rate from the old euro to a new German currency. In the topsy-turvy world of currency exchange, strength can be a drawback. A weaker currency can "afford" less of a stronger currency, so an exchange from euros into a German currency might yield less than you might think. In theory, this shouldn't matter if the German currency remained strong after the exchange, but it does make you vulnerable to a valuation inefficiency at the time of the exchange.

Speaking of exchange rates, there is another risk factor to consider if you are living in the United States. Your account will not only be affected by the exchange rate from euros into a new German currency, but also by the ongoing exchange rate between the dollar and that new currency. If you think of your German account as a conservative savings account, you might find yourself taking much more risk than one would normally associate with savings accounts due to currency fluctuations.

Those fluctuations might come fast and furious in the uncertainty surrounding the transition, and in the early days of a new currency. If you want to save yourself some volatility, this might be a good time to start checking out U.S. savings accounts.

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Q: I will be getting about $129,000 very soon. I need about $1,500 a month for living expenses. Ideally, I'd like to invest the money and just draw off the interest to meet my expenses, but this doesn't seem possible at today's interest rates. What is your advice for how I can invest this money to get the return I need?

A: You are absolutely correct that today's interest rates won't come close to yielding the type of income you want. According to the FDIC, the average rate on savings accounts was just 0.11 percent as of late December. On an investment of $129,000, that would yield only $141.90 in income annually. A five-year CD could get you up over 1 percent, and you could probably add another percent on top of that if you shop for the best CD rates. Still, this would leave you at around $2,580 in annual income, or $215 per month - well short of your goal.

The problem isn't just that interest rates these days are unusually low. Even under normal circumstances, your income target would be overly optimistic. $1,500 a month would come to $18,000 in annual income. That would represent a return of nearly 14 percent on a $129,000 investment. CD rates have rarely been that high, and not since the early 1980s. Even stocks have not generally produced returns of that size, and in any case, a heavy stock allocation is risky when you are withdrawing a significant amount from a portfolio, because withdrawals tend to amplify market volatility.

Under the circumstances, there are two things you should consider:

1. Rein in your income expectations, ideally to 5 percent or lower. This would mean $6,450 in annual income from $129,000, or $537.50 per month. Even 5 percent isn't a sure thing, but if you withdraw any more than that you will increase your risk of drawing the principle down over time.
2. Try a mix of stocks, bonds, and short-term income securities. You'll want to keep the mix pretty conservative because of your withdrawals, but having some stock representation will give you a shot at earning more than today's low interest rates, and also give you a better chance of keeping up with inflation over time.

It's a shame that you can't count on the level of income you had hoped for, but you are doing the right thing by asking these questions in advance. Too often, people fail to plan for a sustainable level of income, and don't acknowledge the problem until their principle has been dissipated to the point where income production is severely compromised.

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Q: What is the average interest rate on a $1 million savings account? What would the annual interest be?

A: Your question raises an interesting point about the nature of averages. There are times when an average gives you a good indication of conditions, but there are other times when averages can be deceptive. It really depends on how much variation there is from the average. For example, a planet where daytime temperatures rise to 140 degrees and nighttime temperatures fall to 0 degrees would have an average temperature of 70 degrees. The average makes it sound comfortable, but the reality is much more inhospitable because of the amount of variation.

So, when answering your question, it is worth touching on both the average interest rates for savings accounts, as well as exploring what some of the variations are.

According to the FDIC, as of early December the average rate on U.S. savings accounts was just 0.11 percent. At the same time, MoneyRates.com was listing a number of savings accounts with rates in the 1 percent range - roughly nine times the national average. In dollar terms, on a $1 million savings account, the national average of 0.11 percent would earn just $1,100 a year in interest. In contrast, a 1 percent rate would earn $10,000.

In short, savings accounts are one example where it may not be a good idea to judge things by the average. If you shop carefully for above-average savings accounts, you should earn a good deal more interest. You might well wonder whether an account as large as $1 million might earn you some extra interest. Normally, this would be the case, but today's conditions are different. The FDIC rate survey shows no interest premium for "jumbo" savings accounts--those in excess of $100,000. This is for the same reason that deposit rates generally are low.

A weak economy has left banks with few ways of making money through loans or investments, so they are not particularly interested in attracting deposits right now. Indeed, some banks actually view deposits to be a liability under these circumstances, because a large deposit base waters down their rate of return.

Again, the above describes conditions in general, but you might well find exceptions. When you shop around, ask specifically what the bank would be willing to do in exchange for a large deposit. If not a premium interest rate, perhaps the bank will offer some other perks that would be of value to you. However, you may be better off spreading your money around to a few different banks, since $1 million is well in excess of the FDIC deposit insurance limit of $250,000.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.