Investment offerings cannot be simply classified as risky or safe. There are different levels and types of risk that a certain investment can have. The market risk, for instance, is present in bear and bull markets. Investors also need to consider the purchasing power, reinvestment, interest rate, political, liquidity, tax, and legislative risks of an investment.
Equity-based investments are susceptible to market risk, while fixed-income investments are vulnerable to reinvestment, interest rate, liquidity, and purchasing power risk. All kinds of investments are subject to legislative and political risk. The kind of risk that applies to investment depends on its characteristics. The level of risk depends on the type of investment and its potential rewards.
Understanding the level and type of risk as well as potential rewards of a certain investment can help you find opportunities with high returns while still enjoying a bit of safety. This will also help you make better decisions regarding the kind of investment that you should add to your portfolio. Here’s a list of low to moderate risk investments that offer high yields.
Utility stocks are noncyclical stocks, so their prices are not affected by economic contraction and expansion. The dividend rate of utility stocks is usually 2 to 3% higher than treasury securities. Utility stocks can be purchased through online brokers, and they are often rated in the same way as preferred issues and bonds. These stocks have a higher market risk compared to preferred issues. Utility stocks can be sold anytime.
Brokered CDs are ideal for investors who can’t lose their principal. Many brokerage companies offer it. Brokered CDs don’t pay as high as utility and preferred stocks, but it can pay higher than their counterparts that are offered by personal bankers. It is offered like bonds and insured by the Federal Deposit Insurance Corporation (FDIC) as long as the investor holds it until maturity. Broken CDs are traded in the secondary market. If you sell the CDs before maturity, you may earn less than its face value. Brokered CDs have the same liquidity risk as other kinds of bonds.
With fixed annuities, you can invest as much as you want and allow it to grow tax-deferred until your retirement. This kind of investment is perfect for retirement savers who want to add high yield investment to their portfolio without risking their principal. The interest and principal in fixed annuities are secured by the financial stability of the life insurance company that provides them.
State guaranty funds also compensate investors who bought annuity contracts from insolvent carriers. Fixed annuities have a lower rate compared to preferred and utility stocks. The pay rate of fixed annuities is usually around 0.5 to 1% higher compared to treasury Securities and CDs. Some companies provide a higher initial rate to attract investors. Annuity contracts are protected from creditors and exempted from probate.
Indexed annuities allow investors to earn a portion of the yields in the equity or debt markets. This kind of investment offers a great return on capital, provided that the market performs well. Indexed annuities may provide small consolation gains under a bear market. Annuities carry liquidity risk, purchasing power risk, and interest rate risk.
Preferred stock acts like bonds and trades like stocks. It usually pays quarterly or monthly. The stated dividend of preferred stock is typically 2% higher compared to treasuries and CDs. This kind of investment has low liquidity risk because it can be sold anytime without any repercussions. However, preferred stock is subject to tax risk and market risk.
There are different kinds of preferred stock. One of these is the convertible preferred that you can convert into a specific amount of common stock shares. Cumulative preferred accumulates dividends that the issuer can’t pay because of monetary problems. The past-due dividends are paid to the shareholder once the company fulfills its obligations. Participating preferred is another kind of preferred stock. Shareholders receiver bigger dividends if the issuing company is making a lot of money.
If the issuing company is financially stable, the preferred stock will get a higher rating from credit rating agencies. Lower rated stocks have a higher rate, but they also have a higher default risk. If the issuing company gets liquidated, those who own preferred stocks can get their investment back from the company before the other stockholders. However, they don’t have voting rights.
Bond and UITs
Unit investment trusts and bond mutual funds are also ideal for those who want higher yields. Income-oriented mutual funds invest in mortgages, utility stocks, senior secured loans, preferred stocks, and bonds. The diversity of this investment reduces its reinvestment and market risk. Investors can also combine various kinds of securities to get a higher payment with less risk.
Since there are a lot of income funds to choose from, you should know exactly what you’re looking for. Some funds invest in mortgage-backed securities and junk bonds to offer higher yields, while others are conservative and invest only in treasury securities and cash instruments. You can also invest in exchange-traded funds, a packaged collection of pre-selected securities that trade every day in the markets. Exchange-traded funds can be sold or purchased in intraday trading.
Income funds carry tax risk, market risk, and reinvestment risk. Conservative funds have purchasing power risk, while international funds carry political risk. You can buy these funds through a robo advisor or through an online broker. Funds that invest only in utility stocks are also considered income funds. If you want to buy utility stocks, you can diversify by purchasing utility funds.
There’s no risk-free investment. All investments carry different kinds of risk, so you just need to be careful in choosing one. If you’re willing to add low-risk investments with high returns to your portfolio, you should consider the ones listed above. Determine how much you are willing to spend and don’t invest what you can’t afford to lose. You can also ask your financial advisor for guidance.