Low-risk is a relative term when it comes to investing. The classic risk-free investment is Treasury securities, but even they carry some degree of price risk from changes in interest rates, though the risk of default is slim to none. Additionally, the definition of "low-risk" will vary from investor to investor based upon their circumstances and their individual risk tolerance.
For those looking for low-risk investments, here are some to consider.
7 Low-Risk Investments With High Returns
1. Dividend-Paying Stocks
To be clear, dividend-paying stocks do carry risk as they are still subject to the same factors that impact the stock market. However, among stocks, those that pay consistent dividends tend to be a bit more stable and less volatile than some others.
When investing for dividends, there are two main approaches. Investing for dividend yield is about finding those companies that pay higher dividends as a source of yield. Utilities and some consumer staples generally have higher-than-average dividend yields.
The other dividend investing strategy is dividend growth. There is a group of stocks labeled the Dividend Aristocrats that have increased their dividend payout level for the at least the past 10 years. While their yield may or may not rank at the highest level, these companies tend to be strong performers with solid management.
2. Preferred Stock
Preferred stock is a class of stock issued by companies that tends to act more like a bond than a stock. Preferred shares provide shareholders with a preference in terms of receiving a dividend before shareholders of the company's common stock. They are also in line ahead of common shareholders in the event that the company declares bankruptcy or liquidates its assets.
Preferred stock is riskier than investing in bonds, but less risky than regular common stock.
3. Corporate Bonds
Corporate bonds are debt instruments issued by companies to raise capital to finance ongoing operations or a specific need such as erecting a new facility. In exchange for investing in these bonds, bondholders are paid interest, usually semi-annually. The face amount of the bond is then repaid when it matures.
Corporate bonds are rated by outside rating agencies such as Moody's and Standard & Poor's. These ratings range from AAA down to B and below. Those rated below BBB/Baa3 are considered to be junk bonds and have a higher risk of default.
Bonds have two types of risk:
- Interest rate risk arises from the potential of an increase in prevailing interest rates. Bond prices move inversely with interest rates so an increase in interest rates lowers the price of your bond.
- Default risk. If the company who issued the bond should default, bondholders may be at risk to either not receive anything or to receive less than the face value of their investments, in addition to not receiving the interest payments.
4. Treasury Securities
Treasury securities include Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Inflation-Protected securities (also known as TIPS).
These various options have different maturities and other differing characteristics. Treasurys are often referred to as riskless securities and they are, in the sense that they are backed by the full faith and credit of the United States Treasury.
There are the same risks as with any other type of bond or fixed-income security in terms of interest rate risk. The price of these Treasurys will fluctuate up or down based on the direction of interest rates during the period you are holding them. They will be worth the full face value of the security upon redemption.
5. Certificates of Deposit
Certificates of deposit, or CDs, are deposit accounts offered by banks. You deposit the funds for a specified period of time. This accounts are FDIC insured so they are very safe.
CDs pay a specified interest rate over the life of the CD, so there is no uncertainty. This interest rate will not fluctuate based on prevailing interest rates or any other factors.
The downside is that your money is essentially locked up for the term of the CD. If you withdraw the funds early, there are usually penalties. So be sure that you don't commit funds that you will need prior to the maturity date of the CD.
A good strategy can be to ladder CDs, in other words, have several that are staggered by maturity date. That way there will consistently be some funds maturing that you can use or invest in other CDs or elsewhere.
Annuities come in a number of "flavors" including variable annuities, fixed annuities, immediate annuities, deferred annuities and others. In all cases, the investor buys into an annuity contract with an insurance company, they will then have several options in terms of how to take their money out presumably in retirement.
Variable annuities have underlying investment sub-accounts that are much like mutual funds and there can be considerable investment risk prior to the time the annuity holder decides to annuitize. Annuitization also comes in several forms, but a common one is a stream of monthly payments for the account holder's life or a minimum set period.
The benefit is that the stream of payments is guaranteed by the insurance company. This can also be a risk in the unlikely event that the insurance company defaults. There have been a few instances of this over time. The other risk is that annuities can also sometime have very high expenses that are hard to understand but detract from the account holder's eventual level of payments.
7. Money Market Funds
Money market funds are interest-bearing accounts offered by mutual fund companies, brokerage firms and others. The underlying investments are money market instruments including short-term Treasurys, CDs and other money market instruments.
These accounts have daily liquidity via an online trade or a check.
The risk is that the interest rates are relatively low, and they will fluctuate based on the direction of interest rates. Note the net asset value of each share remains at $1 in most cases, so this isn't a risk most of the time. Changes in the money market rules in the years following the financial crisis allow some types of money market accounts to "break the buck" and let the NAV fluctuate. Some funds may also be allowed to restrict access to your funds in some extreme cases. It is best to understand any and all such rules surrounding a money market fund you may be considering prior to committing your funds.