8 Low-Risk Investments With High Returns

If you want to grow your money and build your wealth, you need to invest it. What if you don’t invest for the long-term? Well, you risk running out of money in retirement and struggling to cover your expenses later in life.

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Sadly, many working Americans today don’t invest their money in various factors. For example, a 2019 GOBankingRates survey found that the reason 55% of Americans aren’t investing is that they cannot afford to.

If you’re living paycheck to paycheck, that is a valid reason. In reality, though, if you were able to put $50 a month into an IRA or 401(k) starting at age 25 and get a 7% average annual return, by 45, you would have $171,000.

Additionally, Marcus by Goldman Sachs conducted a survey that found that another barrier to investing is that people find it overwhelming, precisely because;

  • Most respondents have difficulty deciding where or how to invest (51%).
  • 44% of respondents feel they don’t know enough about investing.
  • There is a concern that it takes too long (23%).

What’s more, 48% of Americans believe the market is rigged against individual investors, according to a Bankrate survey.

But, there’s another reason why people steer clear of investing; it’s too risky.

While it’s true that markets fluctuate, there’s always an investment option for every risk tolerance level. Moreover, diversifying your investment portfolio by owning various assets with different performance characteristics over time can mitigate potential losses.

What about financial crises? Sure. There’s always a chance that these will happen. But, consider that between 1929 and 2015, a diversified portfolio of 70% stocks and 30% bonds had an annual return of 9.1% between 1929 and 2015. Even if history isn’t your wheelhouse, I’ll say that were lots of ups and downs throughout that timeframe.

Most importantly, never invest money that you either can’t afford or stomach to lose. For example, a lot of people might be able to ride the volatility on a $500 crypto investment. But, losing $20,000 after investing $100,000 in such a risky investment is nothing to scoff at.

With that in mind, let’s take a look at eight low-risk investments that also have high returns.

1. High-yield savings account.

Since we’re talking about low-risk investments here, we have to get one of the safest options out of the way first; high-yield savings account.

If you’re unaware, a high-yield savings account is a federally insured savings account. They are appealing because these accounts have higher interest rates than the national average. Generally, they earn roughly between 0.40% and 0.50% APY. FYI, the national savings average is 0.06% APY.

Although high-yield savings accounts aren’t all that thrilling, they do provide a substantial rate. What’s more, you won’t need to exert any more effort to increase your balance. And, you can easily open an account online, such as Chime, Marcus, Alliant, Discover, or Varo.

So, let’s say that you’re able to open an account with a 0.50% APY. If you had $10,000 in your account, then you would earn a smidge more than $50 annually. While that won’t put you on the Forbes billionaires list, it’s much better than the five bucks you’d make with an account offering a 0.05% APY.

2. Short-term bonds.

Investments in short-term bond funds typically invest in securities that mature within a year to three years. In addition to commercial papers and certificates of deposit, they also invest in long-term securities and government securities.

The government, corporations for investment, or companies rated below investment grade may issue short-term debt (bonds). Bonds can also be purchased for dividends or growth as well.

What makes short-term bonds particularly attractive? First, short-term bonds have a lower interest rate risk compared to intermediate or long-term bonds. As such, short-term bonds are less prone to market fluctuations. On the flip side, they provide higher yields than money market funds, with possible interest rates ranging from 0.5% to 1.25+ percent.

Investors should be aware that short-term bond funds can result in the loss of their principal. And, if you purchase a corporate bond fund, it’s not insured by the government.

3. TIPs.

TIPS — and not the tips you leave waiters and waitresses are a type of U.S. Treasury bond explicitly designed to protect investors from inflation. You can purchase them from the government over at treasurydirect.gov in $100 increments with a minimum investment of $100.

As inflation rises, the TIPS’ principal value increases. When there is deflation, the principal value is adjusted downward. Like traditional Treasury bonds, TIPS are backed by the full faith and credit of the U.S. government, explains Colin Martin for Schwab.

“Although there are many measures of inflation, TIPS are referenced to one specific index: the Consumer Price Index, or CPI, a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, published monthly by the U.S. Bureau of Labor Statistics,” he adds.

As with traditional Treasuries, “TIPS have fixed coupon rates and make semiannual interest payments,” writes Martin. However, although coupon rates are fixed, actual coupon payments can vary based on underlying principal values.

In most cases, TIPS come in 5, 10, 30-year maturities. Whenever TIPs mature, the adjusted principal or the original principal is returned. It just depends on whichever is greater.

The downside to TIPS? Their interest rate is lower than that of a U.S. Treasury bond or note. So, if inflation or deflation does not occur, you will not receive any benefit.

4. Dividend-paying stocks.

Now that we’ve gotten the safer, albeit boring investment options out of the way, let’s pump up the volume a bit with dividend-paying stocks.

For investors new to investing, these are stocks that regularly distribute cash to their shareholders. So while dividend stocks can provide you with another income , you can also build wealth gradually by investing in reliable dividend stocks.

“Long-time dividend growth investors know the power of patience,” notes Dan Burrows for Kiplinger.

“The best dividend stocks – companies that raise their payouts like clockwork decade after decade – can produce superior total returns, even if they sport apparently ho-hum yields,” he states. Increased dividends also lift yields based on an investor’s original cost basis. “Stick around long enough, and the unimpressive 1% yield you received on your initial investment can grow by leaps and bounds,” says Burrows.

Investors can also feel at ease with companies that have consistently grown their dividends. It is a powerful testament to a company’s financial resilience and commitment to its shareholders when it manages to raise its dividend year after year, despite the recession, war, market crashes, and more, he adds.

And, this is where Dividend Aristocrats come into play.

“The Dividend Aristocrats are companies in the S&P 500 Index that have raised their annual payouts every year for at least 25 consecutive years,” explains Burrows. “This list of the S&P’s best dividend stocks is a mix of household names and more obscure firms, but they all play key roles in the American economy.” Moreover, although they’re spread across almost every market sector, they all have one thing in common; a commitment to steadily growing dividends.

Examples include NextEra Energy, West Pharmaturial Services, Aflac, Walmart, Kimberly-Clark, Illinois Tool Works, and Procter & Gamble.

5. Preferred stocks.

Sticking with low-risk stock investments, let’s move on to preferred stocks.

As with regular (or common) stocks, preferred stock is a share of a company. But, preferred stock comes with extra shareholder protection. Preferred stockholders, for instance, get priority when it comes to dividends.

As part of the company’s capital structure, preferred stockholders also rank higher. That means they’ll receive a dividend before common shareholders. Preferential stocks, therefore, are less risky than common stocks but are still riskier than bonds.

While common stock and preferred stock use the same name, they’re entirely different regarding risks and rewards. That’s because preferred stocks are fixed-income investments that are a hybrid between a stock and a bond.

  • Generally, preferred stocks pay dividends regularly.
  • The price of preferred stocks can change in response to changes in interest rates, just like other fixed-income securities.
  • Preferential stocks can be redeemed at a par value, usually $25 per share, as with bonds. Both can be repurchased by an issuer, or “called,” after a certain amount of time, typically five years.

At the same time, preferred stock has special privileges that bonds don’t possess. In the world of fixed-income securities, preferreds are unusual because of their unique characteristics. These include;

  • Preferred stocks, unlike bonds, don’t have a defined term making them neverending.
  • Occasionally, preferred stocks give holders the opportunity to exchange their preferred stock for a certain number of common shares at a specific price.
  • There are no penalties for postponing or canceling preferred dividends.

Overall, the flexibility of preferred stock makes it a more preferable investment over a bond that can yield a higher rate of return to investors.

6. Annuities.

If you’re in your 20’s, you can probably skip ahead to the next option since an annuity doesn’t make much sense. But, if you’re in your 30’s or older, you shouldn’t overlook annuities as a potential low-risk investment with a high return.

“A person who buys an annuity will receive an income stream for the rest of their life,” explains Albert Costill in a previous Due article. “In most cases, this is after the annuity was purchased with a one-time payment.” Nevertheless, annuities appeal to retirees because Social Security and investment savings may not be enough to meet their needs.

“With a traditional annuity, this income is provided through a process of accumulation and annuitization,” he adds. But immediate annuities don’t work that way. Rather than accumulating payment over time, these start providing payments immediately.

“Deferred annuities are purchased by paying a premium to the insurance company,” states Albert. “Based on your contract, the initial investment will grow tax-deferred over the accumulation phase, typically ranging from 10 to 30 years. Then, depending on your contract terms, you’ll receive regular payments during the annuitization phase.

“You’re protected from market fluctuations since the insurance company assumes all the risk of a down market in annuities,” he continues. “What’s more, this provides longevity risk meaning that you won’t outlive your money.”

Insurance companies charge a variety of fees to offset this risk. Services such as investment management, contract riders, and other administrative activities can fall within this category. Also, most annuity contracts may have a surrender charge during their surrender period.

Furthermore, indexed annuities commonly have caps, spreads, and participation rates, which reduce returns.

Your best bet? Purchasing a fixed annuity, like with Due, where you’ll get 3% a month on your money.

7. P2P lending.

It may seem hard to believe, but peer-to-peer lending has been around since the 1700s. For example, Gulliver’s Travels author Jonathan Swift loaned small amounts of money to those in need without charging interest. Eventually, peer-to-peer lending (or “social lending” as it was called then) became one of the most prevalent lending methods in Europe in the 18th and 19th centuries.

But, we need to focus on P2P lending in the 21st Century. For example, you could have your money with a platform like Lending Club, which is what Jeff Rose, the Wealth Hacker, has done for some time.

“So I have a few different accounts with Lending Club,” he says. “And the oldest one that I’ve had, I went from being conservative to a little bit more aggressive.”

“And as of right now, I have one account that has paid me about 5.36%, he adds. “I have a few other accounts that are greater than 7%. So I don’t know if enough time has passed to some of the loans to default on that to affect that rate.”

Rose says that you want to keep that top of mind with P2P. However, since you’re usually able to make between 5 and 7 percent, which is equivalent to a bond, that’s not too shabby.

8. Online real estate.

“Online real estate investing platforms work by connecting investors to people who are looking for funding for their income-generating real estate projects,” notes Rumzz Bajwa for Due. “Investors come together online, pool funds, and invest in a commercial or residential property in exchange for profits.” The process is known as real estate crowdfunding.

According to their agreements, investors who use online real estate platforms will earn an income from their monthly or quarterly investments. However, online real estate platforms have the disadvantage that you may need to be approved as an accredited investor to invest. “In other words, to qualify for the investment, you must have earned at least $200,000 in annual income for the past two years, or have a net worth of at least $1 million (as an individual or combined with your spouse’s net worth),” she explains.

However, there is some good news if you don’t meet these requirements. First, you can turn to platforms like Fundrise, RealtyMogul, or Groundfloor that are tailored to non-accredited investors.

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